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Payday advance: how to help your employees

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No matter how much money you earn, financial emergencies can arise. As a small business owner, you might be faced with a situation where an employee requests a payday advance. You may also be asked questions about this process, and if it is something you payroll offers. Below are some common practices for providing a payday advance and some tips to make things easier for you and your employee.

What is a payday advance?

A salary advance is an advance on future salary that would normally come from the employer pay cycle. Considered a short-term loan, a payday advance is agreed to by both the employer and the employee and is usually repaid to the employer from future paychecks. This is an optional benefit intended for use only in an emergency situation, such as a large unforeseen expense. Since the employee borrows money on the next payday, payday advances should be used sparingly and with caution.

How to Talk to Your Employees About Payday Advances

When you talk to your employee, they may use the term “payday loan” or “cash advance”. It is important to understand that a payday advance and a payday loan are not the same, although they are often interchanged or confused.

While a payday advance is a hassle-free loan offered by the employer, a payday loan is provided by an outside payday lender at a much higher cost, usually between $ 10 and $ 30 per $ 100 borrowed. In some cases, payday lenders target people who need cash immediately and may not have other financing options available. In these cases, payday lenders are able to charge high interest rates and may charge additional fees if the payment is not repaid on time. This is a different circumstance than the predominantly interest-free salary advance from the employer.

Before agreeing to take or provide a payday advance, the following advantages and disadvantages should be considered:

Employee benefits

Some benefits of a payday advance for the employee include:

  • Immediate payment : If an employee is asking for a payday advance, it’s likely because they need quick access to funds. A payday advance can be especially useful when employees are faced with an unexpected expense, such as a medical bill or car repair. Funds can often be sent by direct deposit to your bank account or credit union and may be available within one or two business days, depending on the employee’s financial institution.
  • Ease of access and reimbursement: When discussing a payday advance with your employee, you’ll want to agree on repayment terms. Your employee will benefit from flexible reimbursement options if you are able to provide them. You can accept full repayment of the advance over the employee’s next pay period or installment payments over a series of pay cycles. Payroll reimbursement of funds ensures that the reimbursement will not cover overdraft charges on the employee’s checking account, which could cause further financial problems.
  • Better terms: Unlike other cash advance options like personal loans, a payday advance usually comes with better terms. This helps the employee as a whole, as you wouldn’t charge high interest rates, late fees, or an annual percentage in the same way as other options.

Benefits for the employer

While there are obvious benefits to the employee requesting a payday advance, offering payday advances when your employees need them can also have significant benefits for your business:

  • Competitive advantage: A payday advance policy shows your employees that you can help them in a financial emergency. While it might not sound as appealing as other perks like health insurance, it certainly won’t be overlooked by employees.
  • Retention: By offering these types of benefits, you are reassuring your employees that you care about their overall well-being, which can help you improve employee retention.

Disadvantages for the employee

While getting the financing they need has immediate benefits for employees, it’s important to note that there are some drawbacks to payday advances. These may include:

  • Small paychecks: Until the debt is paid, subsequent paychecks will be less. For some employees this might not be an overwhelming problem, however, for employees who are struggling financially, it could make the situation worse.
  • The deductible amount: Withholding from an employee’s wages cannot reduce wages unless the federal minimum hourly wage. Depending on the employee’s salary, this could mean that the reimbursement will be spread over several future paychecks, which could adversely affect the employee’s financial position.

Disadvantages for the employer

While it is more beneficial for the employer to offer these types of benefits, payday advances are not without potential drawbacks:

  • No reimbursement: While unlikely, it is not impossible for an employee to resign or be fired before the reimbursement is made, costing the company money.
  • Payroll cycle disruptions: This is the biggest drawback for you as an employer. Payday advances can have a huge impact on your books and payroll, not to mention an overall increase in paperwork. Additionally, your business should be able to financially support the upfront without disrupting other typical payroll processes.

How to avoid complications

1124_Paycheck_Advancement_Graphic

The best way to avoid complications with this type of request is to have a written policy in place, preferably before an employee needs the benefit. It may be useful to define:

  • Who is eligible
  • How much they are able to move forward
  • How often will this benefit be available
  • How will the refund be made?

While you may want to make every employee eligible, it may make more sense for your business to limit the benefit to employees who have a certain tenure, or to limit it to employees who are in good standing with your business. You should also consider the type of remuneration before accepting any advance.

Employers who wish to offer this option might also consider providing employees with educational materials on financial literacy and financial planning. While this may not mitigate potential slips, it will provide an information base to protect both parties and potentially reduce the need for paycheck advance requests in the future. Topics like setting up an emergency fund, reducing credit card debt, or setting up and managing a savings account are good first steps.

How to complete a paycheck advance

1124_Paycheck_Dos _ & _ Donts_Graphic

There are a few steps to take once an employee requests a payday advance, both by the employee and by the employer. Specifically, the following should be done as soon as the request is made:

For the employee

There are a few specific steps that an employee must take to successfully apply for and obtain a payday advance, including:

  • Put everything in writing: Having everything in writing is key to a successful payday advance for all parties. If an employee verbally requests a payday advance, your first step is to ask the employee to put the request in writing.
  • To have a conversation: Once the request is in writing, the next step is to review and discuss an employee pay advance agreement. You can write one yourself or you can use an employee paycheck advance agreement form template. This includes:
    • employee name
    • Disbursement date
    • Total loan amount
    • Repayment period
    • Possibility of reimbursement if the employee is made redundant
    • Signature and date of employee and employer
  • Discuss the next steps: After going through the payday advance agreement form, discuss the next steps and any questions the employee may have. (They might ask if it will be owed to them retroactive salary, for example.)

For the employer

As an employer, there are a few steps you can take to help make a payday advance as smooth as possible.

  • Before choosing to offer this benefit to your employees, it is important to choose a payroll provider, if it is not done yet. A service like QuickBooks Payroll can help you organize yourself for this specific situation.
  • When a payday advance is agreed, a tax-free type of money must be added to the payroll, which will be used to pay the advance.
  • Once the advance is paid, a deduction must be made for future pay cycles. It is important to add the deduction to the employee’s payroll records so that a fixed amount is automatically deducted until full payment is made.

Aside from the actual process, remember that confidentiality is essential in this delicate circumstance. While you might want to confirm that the advance is needed, you shouldn’t be wondering what the money is for. This not only builds a relationship with your employee, but also eliminates any accusations of potential discrimination in the future.

Paycheque Final Advance Considerations

Remember, the employee requesting a payday advance has most likely exhausted all options. Work with payroll offering a salary advance to employees is sure to be beneficial and greatly appreciated.

To learn more about QuickBooks Payroll, click here

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