HR Question of the Month

Payroll Advances – Best Practices?

Question

We are in need of some information on payroll advances. We have some employees asking for repeated payroll advances and need to know our options and how to proceed as best practices.

Answer

Absent an applicable contract that governs the issue otherwise, the federal Fair Labor Standards Act (FLSA) does not expressly prohibit employers from advancing wages to employees, per se (some states may preclude this, but yours in particular may not). That said, if an employer agrees to do so for one employee, it arguably will need to do so for others (or at least others who are similarly situated) to avoid employee relations issues and potential discrimination concerns. Any time an employer agrees to advance wages to employees it faces the risk of exposure to non-repayment, particularly if an employee who received an advance on his or her wages separates from the company before earning back what was advanced to him or her. Employers can seek to protect themselves from this risk by drafting enforceable wage advance/loan documentation for employees to sign as a condition of receiving any advance on their wages. Such contracts can, in most cases, require non-exempt employees to agree to payroll deductions as a means to repay the loaned/advanced amount. Under federal law, such deductions are allowed even if they result in a sub-minimum wage payment, as this is one of the few instances in which such payroll deductions are permitted. This was addressed by the US Department of Labor (DOL) in a (still good) 2004 Opinion Letter wherein it restated its "longstanding position that where an employer makes a loan or an advance of wages to an employee, the principal may be deducted from the employee’s earnings even if such deduction cuts into the minimum wage or overtime pay due the employee under the FLSA. An employer may not, however, make an assessment for administrative costs or charge any interest payment that brings the employee below the minimum wage." Although this Opinion Letter addressed a unique set of facts, the DOL's opinion on this aspect of federal wage/hour law is still instructive.

Ultimately, if no contract provides an entitlement to advanced wages, employers are not required to agree to employee requests of this nature. Many employers do not offer the option. If the employer does not wish to do so (and particularly if it finds that employees are "asking for repeated payroll advances"), the employer is well within its rights to decline such requests, and can stand firm on a policy and practice that does not support advancement of wages or monetary loans to employees under any circumstance. Even if the employer has done so in the past, it can establish a revised policy to apply prospectively where no such loans or advances will be made going forward. If the employer wishes to go this route, it can and should inform employees of the approach (and particularly if this is a change to prior practice or policy, but even if it is not), as there are no federal or state employment laws that entitle employees to wages they have not yet earned.

If, however, the employer is willing to loan one or more employees money as an advance on wages, again it can proceed if no contract precludes this. That said, the employer would do well to establish a formal policy on the issue, one that makes clear the circumstances under which the employer will (and perhaps will not) agree to such requests. If the employer wants to limit wage advances to a certain dollar amount, or limit the number of times an employee's requests will be granted, or reserve discretion to deny requests in certain situations (perhaps due to company finances, or in cases where the employer is aware of an impending layoff, for example), etc., it can do so, and such restrictions should be expressly stated in any policy to this effect. Any payroll advancement/loan policy should also make clear the terms and conditions of repayment and the consequences of failure to repay. The employer can and should require employees to sign enforceable loan documentation and an equally enforceable promissory note before receiving any such monies, and such documentation should address repayment both during employment (perhaps through payroll deduction) and after it ends for any reason, if at that time the amount has not fully been repaid to the employer. The employer's policy and loan/advance agreement should stipulate whether there are any circumstances under which “loan forgiveness” will occur (although this is not required), and/or whether or not a balloon payment can/will be taken out of any final wages where permitted by applicable law, as well as the consequences of any non-repayment (which may include pursuit of legal action by the employer to seek restitution, through subsequent wage garnishment or otherwise, as well as termination of employment if applicable).

Before proceeding either way, we recommend that the employer establish a formal policy relative to advancing wages/loaning money to employees (or a policy stating that this is not an available option to employees, as the case may be). Any such policy should be clearly communicated to all employees in advance of its implementation, and then uniformly and consistently enforced prospectively. This means, for example, that if the employer adopts a policy against loans or wage advances, it should not make exception for one or a few employees. And vice versa, if the employer's policy supports such payments, it should not decline a request if it was made properly in accordance with the stated policy. If the employer wishes to proceed with a policy that will support loaning money or advancing wages, it may want to consider enlisting the services of local counsel to draft or review any new or revised policy statement along with loan documentation (if applicable) to ensure there is sufficient protection of the employer's ability to lawfully secure repayment, both during the employment relationship and after it ends. If the employer proceeds with a policy supporting wage advancements or loans, it would also do well to consult with a tax professional such as an accountant or tax attorney, as there may be unique tax treatment afforded such payments and repayments.

Want to know more? Listen to our podcast regarding Payroll Advances.

Logo