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Loans to employees

Many of us have had to make loans to our employees. Whether its short-term (a weeks advance on payroll) or longer-term, how do you handle them? Do you charge interest and at what rate? Do you have them sign promissory notes? Do you do a payroll deduction (which may or may not be legal)?


Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

Wayne, if short-term, come to agreement with the employee the monies will be recouped via payroll deductions over a fixed number of payroll periods. Longer term,if the organizations offers full-value equity awards, the monies can be recouped when the awards vest. An agreement should be signed by both parties. On the HR/Employee relations side, both these approaches can be problematic if they are one-off exceptions especially if these arrangements generally are for executives only or during an audit adverse impact on any of the protected employees groups is suggested. Hope this helps.

(Controller) |

It's different for each state. I imagine most states require a written statement for most payroll deductions and such statement must be in force a certain period of time before the deduction can occur, for instance like 7 days before the deduction happens. Malak's advise also applies.

James Scott
Title: Consulting CFO
Company: Early Growth Financial Services
LinkedIn Profile
(Consulting CFO, Early Growth Financial Services) |

Agree that this should always be documented with a promissory note, and an interest rate added, we charge 2% annual, so it's very small on these short term loans. Payroll deduction is legal in most states, not all, so be sure to check that. It is preferable, if allowed. Also be aware that in some states a lump sum deduction when terminating an employee is not legal, so you may have to be collecting the balance after termination.

Dan Ginn
Title: HR Manager
Company: Italfoods, Inc.
(HR Manager, Italfoods, Inc.) |

As James says, in some states and definitely in California, it is not legal to deduct balance at separation of employment.


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