Financial insecurity can be a productivity killer. Employers who offer empathy toward employees in need of financial assistance can boost employee loyalty and overall workplace engagement.
A 2016 financial education survey, conducted by the International Foundation of Employee Benefit Plans, suggested that financial stress increases absenteeism, tardiness, and disengagement. 60% of respondents who feel financial stress said they are unable to focus at work as a result of their uneasiness and 34% say that financial unwellness increased their absenteeism and tardiness.
On the flip side of the coin, according to the United States Department of Labor, the average voluntary turnover rate is 21%. A study published this year in Harvard Business Review indicates that businesses offering long-term financial security to employees have less than half of the industry averages in turnover.
So, are employee loans the proper way to ensure financial security and improve employee retention strategies?
Why consider employee loans?
It’s more than likely your employees are facing financial concerns, and whether you know it or not, they want your help. In MetLife’s 10th annual study of employee trends, 40% of employees say they want help in achieving financial security.
The most common types of financial stresses your employees are feeling, as reported in a 2016 financial education survey conducted by the International Foundation of Employee Benefit Plans include:
- Debt (66% of respondents)
- Saving for retirement (60%)
- Saving or paying for children's education (51%)
- Covering basic living expenses (48%)
- Paying for medical expenses (36%)
These are major life milestones, or essential costs, that impact many of your employees throughout different stages of their life at your company. At some time, you may get a request for an employee loan to cover one of these expenses.The requests could range from a small advance to avoid a late fee while covering basic life expenses, to an advance to fund major medical expenses.
If you aren't able to help, the alternate options your employee have for financing these expenses are dismal. According to the American Management Association, while 17% of Americans can turn to a family member or friend for financial assistance, the remainder simply don’t have a solution for emergency circumstances. The options available for the remaining 83% employees include consumer financing from credit cards―if they can get one―with an average of 24.9% annual percentage rates to payday loans with 300-400% APR. Overdraft fees on checking accounts can reach as much as 4800% APR.
It seems like all signs point to “yes” for employee loans, but the answer might not be that simple. What questions should you ask to determine if this is a policy that makes sense for your organization? Should everyone qualify for the benefit? Are there alternate options an employer can consider?
Questions to ask before lending your employee money
How do employee loans affect your taxes?
Lending money to your employees may mean additional taxes for a company, if the loan is not carried out properly. Loan terms must be clearly detailed and the interest rate on the loan must be applied at the applicable federal rate and reported as income. If the loan is not orchestrated properly, you may be subject to penalties or tax obligations. Worse still, you may even be charged with doing something illegal if the loan is not filed in the correct way.
The IRS explains that an employer can generally deduct loans as an advance to an employee if you expect the employee to repay the advance. But if the employee doesn't repay the loan, through services or monetary reconcilement, employers need to treat it as income.
Ensure that you understand what you’re getting into before offering employee loans or they might end up costing you.
Can you gauge if this employee has chronic financial problems?
Do you trust this loan will be paid back? According to a survey by HomeServe USA nearly 1 in 5 (19%) Americans have nothing set aside to cover an unexpected emergency, while nearly 1 in 3 (31%) Americans don’t have at least $500 set aside to cover an unexpected emergency expense.
Whether this typical culture of living paycheck-to-paycheck is a result of money mismanagement or insufficient wages is situational, it poses a risk that if your employee is in financial trouble now, a loan might not be the solution to their problem.
Examine each request carefully. Enabling an employee’s poor financial decisions could end up doing more harm than good. Offering financial wellness programs at your organization might help uncover, and alleviate issues like chronic debt and unnecessary discretionary spending which as a result may limit the amount of employee loan requests you receive.
Can you limit the number of loans you’ll dole out?
Set clear expectations of what someone can expect from your generosity. Is this a one-time occurrence for a major life milestone, or does your employee plan to ask for monthly assistance to help ward off late fees?
Employee loans might make sense for unique scenarios, but for frequent, small requests, there may be other non-disruptive solutions your payroll department can offer. Consider a daily pay program that would allow your employee to be paid their earned income as often as they would like, without a disruption to your payroll schedule. This type of new employee benefit can eliminate the requests for employee loans, and help create financial wellness to your employees.
Will employee loans cause favoritism?
Loaning money to employees will not be an equal advantage for everyone. Odds are, you wouldn’t loan to an employee who is at risk of termination. You might not be as eager to loan to an employee who is new to the organization and hasn’t proven their loyalty yet, either.
Without setting clear rules for who is eligible for a loan and who isn’t, you could be setting yourself up for program complications. This concern can muddy the waters when it comes to employee loans and if they are right for your company.
Alternatives to employee loans
Offering loans to your employees can get complex and expensive from an employer standpoint. Still, employers may feel shared responsibility for their employee’s well being. Not all requests will be worthy of a full-fledged loan. What if you can offer a small perk to your employees so they can escape some consumer debt traps, without needing to worry about tax laws or favoritism?
DailyPay allows your employees to be paid daily, and escape late fees or help cover unexpected hardships through the use of their own income. It’s not a loan, rather, it is a non-disruptive payroll solution that allows employees to be paid income they've already earned.