by Raanon Gal and Glianny Fagundo
Many employers have been faced with a valued employee who is undergoing financial hardship asking for a pay advance or loan to help him get back on his feet. Employers are often tempted to give an employee a loan or pay advance because it seems like the right thing to do. What type of employer doesn’t want to help out a good employee? However, loans and lending practices are subject to a variety of laws that may turn a nice gesture into an administrative burden. While pay advances are less onerous than loans, they are still fraught with risk. Employers should carefully consider the unintended consequences when an employee asks for a pay advance or loan.
Loan documents can be complicated
A promissory note—the type of document generally associated with a loan—must have a variety of information to make it valid and facilitate its enforcement. For example, generally, a promissory note must be for money, not property. In other words, it may not be used to recoup money for equipment and uniform payments. The loan note must include a specific promise to pay and an acknowledgment that money was received. The amount of money must be clearly set forth (i.e., not a line of credit), the loan must be payable on a specific date or on demand, and the note must specifically state the interest rate that will be charged. Failing to charge the minimum interest rate considered appropriate by the IRS—known as the “applicable federal rate”—may result in imputed interest being assessed by the IRS, or it could be deemed compensation to the employee. It should also be noted that although the employer wants to help out the employee, repayment is not certain. If an employee is relieved of the obligation to repay the loan, this will result in forgiveness of indebtedness income to the employee.
Other laws may also come into play. Employers that regularly make loans to employees may subject themselves to consumer credit and lending laws. If a company agrees to deduct loan payments from an employee’s wages, it may run afoul of the Fair Labor Standards Act (FLSA) if the deductions bring the employee’s compensation below the minimum wage.
Pay advances
Administrative burdens imposed on pay advances may be less onerous if the advances are limited. One-time advances are generally OK and easy to administer. If multiple advances are involved, the employer may face a number of risks such as having the advances treated like a loan (triggering tax and lending issues) and being unable to collect the advances if the employee leaves.
Tips and alternatives
There are other ways you can help employees in need besides offering loans and advances. One alternative is creating a paid time off bank so employees can donate paid leave to help coworkers who need time off. Also, consider offering an employee assistance program (EAP). An American Psychological Society study concluded that when employers provide EAPs, productivity improves 36 percent of the time.
In addition, you could create an internal employee assistance fund to simply give money to employees in need. An alternative to establishing an employee assistance fund is helping employees set up a crowdfunding page (e.g., through GoFundMe) that allows the company and coworkers to provide financial support. Matching donation programs can yield great results and boost morale. However, they can cause administrative headaches.
Finally, consider making a list of charities and nonprofits to which you can refer employees, such as consumer counseling organizations. Employees in distress sometimes don’t know where to turn, and pointing them in the right direction can be an immense help.
Bottom line
Importantly, regardless of whether you opt to offer loans, wage advances, or an alternative, you should have a policy that clearly outlines when and how special payments will be made. Such a policy will help you ensure consistency across departments, steer clear of inquiries into matters that are protected by law or could lead to lawsuits (such as specific medical conditions that are causing the employee the 
financial hardship), and prevent discrimination claims. Further, your policy (and written loan agreements with employees) should be reviewed by a lawyer to ensure that you are in compliance with applicable laws and protected from potential losses.
Raanon Gal 
is an employment attorney at Taylor English Duma LLP. He may be contacted at rgal@taylorenglish.com.
Glianny Fagundo is a partner at Taylor English Duma LLP. She may be contacted at gfagundo@taylorenglish.com.