It may benefit employees if you can offer them a payroll advance in times of financial emergencies. Here’s how to offer an advance to your employees.
- Employees may request a payroll advance in times of financial stress or life events.
- Offering employees a payday advance in times of financial stress can boost employee morale and reduce turnover.
- Avoid payroll advance problems with the tips in this guide.
- This article is for employers who want to know how to give employees payroll advances.
When employees have a financial emergency or can’t make ends meet, they have limited options for quick cash. Very few people turn to family; most seek out high-interest payday loans, credit cards or personal loans. According to Pew Charitable Trusts, 12 million Americans rely on payday loans. The average annual borrower asks for a total of $3,000 per year while paying over $500 in interest.
Employers have the opportunity to help employees avoid stressful financial emergencies by providing payroll advances. A payroll advance offers a discreet way to benefit your employee while keeping them productive. It can also discourage the employee from choosing a high-interest loan that puts them further into debt.
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What is a payroll advance?
A payroll 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 paid back to the employer using future earned wages. The terms of the agreement can vary but should be known and agreed upon by the employer and employee.
How does a payroll advance work?
A payroll advance always begins with an employee submitting a written request. Having each payroll advance request in writing forms a paper trail and can also be helpful if there are any issues with the employee (refusal to pay it back, termination, 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 should include a payment plan so you can receive your money back on time.
If you are using the best payroll software, you can quickly process a payroll advance separately. However, if you are manually completing payroll, you will need to process a separate check or electronic deposit. You will also need to note the extra payment in your payroll register so your books reflect the payroll advance.
Employee loan vs. paycheck advance
An employee loan is a sum of money that the employee predetermines. The employer must approve the amount, and the employee uses future paychecks to pay back the loan in agreed-upon installments.
However, the employer is not guaranteed to get the loan money back. If the employee defaults on payments or frequently makes late payments, you will need to consider the consequences on your revenue streams.
A paycheck advance offers the employee pay they have earned, usually a couple of days before payday. A paycheck advance is less risky for the employer, as the employee has already acquired the money.
Pros and cons of offering paycheck advances to employees
Payroll advances have pros and cons for the employee and the employer. The main advantage for the employee is a reduction in financial stress. Removing this stress can help employees stay productive, take fewer sick days, and avoid seeking financial help from a payday loan company that charges up to 600% for quick cash. In addition, the employer can benefit from a more focused employee, resulting in higher revenues with little effort on the employer’s part.
However, payroll advances come with risks to the employer and employee. For example, an employer will see a rise in administrative paperwork and compliance with minimum wage requirements, overtime laws and the federal Truth in Lending Act. Plus, your business must be financially able to offer the employee the payroll advance, which may not be possible depending on your business’s cash flow and relationship with creditors.
Employees can also become dependent on payroll advances, leading to an “advanced paycheck to paycheck” lifestyle that isn’t healthy for the employee or the employer. Limiting how many payroll advances an employee can have per year helps keep this benefit in check and avoids confusion regarding payroll advance policies. In addition, payroll advance policies can outline situations in which payroll advances may be reduced or unavailable, such as an economic downturn, time off, or when workers’ compensation is involved.