How to give employees a payday advance

  • Employees can request a payday advance for financial stress or life events.
  • Providing employees with a payday advance during times of financial stress can boost employee morale and reduce turnover.
  • Avoid payroll advance issues with the tips in this guide.
  • This article is for employers who want to know how to provide payroll advances to their employees.

When employees have a financial emergency or can’t make ends meet, they have limited options for quick cash. Very few people look to the family; most are looking for high interest payday loans, credit cards or personal loans. According to Pew Charitable Trusts, 12 million Americans use payday loans. The average annual borrower charges a total of $ 3,000 per year while paying over $ 500 in interest.

Employers have the option of helping employees avoid stressful financial emergencies by offering them payday advances. A payday advance offers a discreet way to benefit your employee while keeping them productive. It can also discourage the employee from choosing a high interest rate loan that puts more debt into it.

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What is a payday advance?

A payday advance is a financial agreement between an employer and an employee. The employee receives money from the employer in the form of a short term loan. The loan is repaid to the employer using future wages earned. The terms of the agreement may vary but must be known and accepted by the employer and the employee.

How does a payday advance work?

A payday advance always begins with an employee submitting a written request. Having each request for a salary advance in writing constitutes a paper trail and can also be useful in the event of a problem with the employee (refusal of reimbursement, dismissal, etc.).

Once an employee submits the written request to be processed through payroll, both parties (employer and employee) must sign the agreement. The written request must include a payment plan so that you can receive your money on time.

If you use the best payroll software, you can quickly process a payroll advance separately. However, if you manually complete the payroll, you will need to process a separate check or electronic deposit. You will also need to note the additional payment in your payroll register so that your books reflect the payroll advance.

Employee loan vs payday advance

a employee loan is a sum of money that the employee predetermines. The employer must approve the amount and the employee uses future paychecks to repay the loan in agreed installments.

However, the employer is not guaranteed to recover the loan money. If the employee defaults or frequently makes late payments, you will need to consider the impact on your sources of income.

A payday advance offers the employee the salary he has earned, usually a few days before payday. A payday advance is less risky for the employer because the employee has already acquired the money.

Pros and Cons of Offering Payday Advances to Employees

Payday advances have advantages and disadvantages for the employee and the employer. The main benefit for the employee is a reduction in financial stress. Removing that stress can help employees stay productive, take fewer sick days, and avoid asking for financial help from a payday loan company that charges up to 600% for cash fast. In addition, the employer can benefit from a more focused employee, which translates into higher earnings with little effort on the part of the employer.

However, payday advances carry risks for both the employer and the employee. For example, an employer will see an increase in administrative paperwork and compliance with minimum wage requirements, overtime laws, and the Federal Truth in Loan Act. Additionally, your business must be able financially to offer the employee the payday advance, which may not be possible depending on your business’s cash flow and relationship with creditors.

Employees can also become dependent on payday advances, leading to an “advanced paycheck to paycheck” lifestyle that is not healthy for the employee or employer. Limiting the number of payroll advances an employee can have per year helps control this benefit and avoid confusion regarding payday advance policies. Additionally, payday advance policies can describe situations in which payday advances may be reduced or unavailable, such as an economic downturn, time off, or where workers’ compensation is involved.

Did you know? While you may be tempted to ask the employee why they need the payday advance, asking for specific personal data can be discriminatory.

How To Avoid Problems With Payday Advances

Before offering a payday advance through your business, you must have policies in place. The policy should include the following factors to reference when a problem arises.

1. Determine how the payroll advance process works.

There should be a clear and discreet way for an employee to request a payday advance. For example, an employee can complete a form and, if the advance is approved, the employer and employee sign the document. The form would include all of the terms, including fees, interest, the agreed repayment term, and any business specific terms. If the employee does not meet his end of the payday advance, he could face disciplinary action, termination or legal consequences.

2. Define who is eligible for the payday advance.

Specifying eligibility helps you streamline who can get a payday advance and who can’t. Eligibility guidelines are especially useful if your funds are limited or if a particular segment of your workforce has burned you down in the past. For example, you can offer payroll advances to full-time but not part-time employees, or specify that the employee must complete a particular period of work with your company to show their commitment before you consider them for an advance. on salary.

3. Set loan minimums and maximums.

Place a cap on the dollar amount of payday advance each employee can receive under your policy. Caps will help you get your money back and help the employee be financially responsible.

4. Keep all terms in writing.

Include all aspects of payday advances in written policies. Ideally, the same policy should be used with each employee and include all terms. The employee must be aware of these conditions, and the employer and employee must agree on the amounts of deductions and on the start and end of deductions. Both parties must sign the agreement, with a copy placed in the employee’s file.

adviceAdvice: You should not impose the payday advance until your employee has made their first repayment. Next, calculate the payroll rebate amount for future pay periods.

5. Integrate payroll deduction into your payroll software.

Keeping up with changes in payroll taxes, deductions, and compliances is often more than a business can handle. Save time and money by investing in one of our highly recommended all-in-one payroll solutions. Check out our ADP review or our Paychex review to learn more about online payroll software that can help you manage cash advances and more.

6. Define the payroll advance frequency.

Failure to add the frequency of payday advances to your policy could confuse employees and even lead to legal action. Most companies limit their employees to a payday advance once every six months or twice a year.

Key to take awayTo remember : Add a clause that prevents employees from receiving a payday advance if they have not repaid a previous one. Too much leniency on this policy could result in a significant loss of cash for your business.

7. Provide financial education.

After writing a payroll advance policy, consider providing employees with additional resources. For example, when an employee requests a payday advance, you can offer them financial advice or offer them free online financial courses to help them improve their situation in the long run.

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