Things to Consider When an Employee Asks for a Personal Loan

This week I helped two members who had loaned employees money and were seeking to be reimbursed. In both cases, the employers had been deducting installment payments from the employees’ paychecks, but the employees had not fully repaid the loans at the time of their terminations. In one case, the employer had a written agreement with the employee for the loan repayment and in the other case the employer did not. The employer with the written agreement was able to recover some but not all of the balance owed from the employee’s final paycheck. The employer without the written agreement received the bad news from me that state law requires a written agreement to deduct from any employee’s paycheck including their final paycheck. In each case, the employer suffered a loss.

When an employee asks for a personal loan, here are some things to consider:

  1. Is the amount so large that you could not walk away from it if you had to? My advice is not to loan an employee more than you can afford to walk away from if you had to. I give this advice after 20 years of working with employers on questions like these. Deductions from employee wages are in many cases limited by state law. Some states limit the kind of deductions that can be made. States may also limit the amount that an employer may deduct. And, many states require the employee to sign a written agreement to authorize the deduction. Lastly, once an employee is no longer employed, they may no longer have the ability or the incentive to pay their employer back.
  2. Does the employee have other creditors? Sometimes employees who are having money troubles owe more than one creditor. If those creditors are having trouble collecting from the employee, they may take legal action to recover amounts owed. To the extent legal action is taken, the employer may receive court orders that take priority over the employer’s loan repayment agreement. In that case, the employer might not be able to withhold its loan amount in addition to the court-ordered amounts.
  3. Can the employee repay you within a short amount of time? If you decide to go forward with the loan, consider what the repayment schedule should be. If the loan cannot be repaid in one payment, my advice is that repayment occur over a short period of time. My target is within three months. Again, if repayment is being made through payroll deductions, state law should be reviewed to ensure that a deduction of that size is allowed by law.

Contact us with your questions about loans to employees. We are here to help!