Paycheck 'Advances'

Paycheck ‘Advances’

Q:  I’m a small business owner, and every so often one of my employees will ask for an “advance” on their paycheck.  Usually it’s one or two hundred dollars.  On the next paycheck, we usually don’t take out the whole amount but spread it out over the next few pay periods.  Lately, requests are coming up more often, so much so that it’s becoming a bit of a headache for my payroll.  Should I even be doing this?  What do other businesses do? 

A:  I have seen many business owners engage in this practice.  Whether you should be doing this is entirely up to you.

Large employers usually have a blanket policy that prohibits advances.  It’s easier for a manager to say no to an employee (or even prevent the question) when some “impersonal corporation” made up the rules.

But business owners are in much closer contact with their employees, seeing them every day and working alongside each other.  So when someone comes to ask for a $100 advance, it’s hard to say no.  Understandably so.

Having said that, giving advances opens you up to potential problems, the least of which is if someone quits  and leaves, owning you money.  So if you’re going to give advances (and it sounds like you are) you should take some precautions.

Have a written policy.

From what you describe, it sounds like you’ve been winging it from one request to the next.  This could open you up to an allegation of discrimination if you’re not consistent in how you grant requests.  Or expose you to some hard  feelings if something unexpected happens with repayment, or to someone abusing/overusing this perk.

So what should the policy include?

Eligibility –  Something stating “Only employees in good standing, with more than a year with the company can request an advance.”

Amount Limits: For example “Employees may not request more than a $200 advance” or  “employees may not request an advance more than twice a year”.

Repayment:  something like “Advances will be repaid by paycheck deduction over the following 4 pay periods”.  This lets the employee know how big a bite to expect out of the next paycheck.

You get the gist.

Lastly, make sure your payroll staff is aware of minimum wage and income tax implications when giving advances.

More on the topic from nolo.com ; sba.gov; payroll implications; hrpayrollsystems.net

©Copyright Eva Del Rio – Eva Del Rio is creator of HR Box™ – tools for small businesses and startups. Send questions to Eva@evadelrio.com

 

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