Employee Loans - CiteHR
Dinesh Divekar
Business Mentor, Consultant And Trainer
Ed Llarena, Jr.
Owner/ Managing Partner
+2 Others

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We are a small organization of 40 people. My question here is on employee loans (advance). We have a policy wherein advances given to employees are not more than a month's salary and is to be repaid within 6 months... If advance needed above that , proper reason is to be provided and security is needed. What can be done if an employee needs more advance and doesnt have a security/surety to provide. What are the clauses that can be mentioned on an agreement/bond for employees who are working for more than a year and have no security to be provided ? Also, when we mention that the amount will be deducted from the final salary in case of resignation/termination, how about if the amount is more? how can the amount be recovered if he/she quits without intimation ? I am preparing an agreement for advances/loans for employees and was looking at what all clauses can be included. Please Help. Thanks in Advance.
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Hi!

Direct Employee Loans to be drawn from company operating funds is a big NO NO to big organizations. Aside from being illogical, the administration of personal loans/ advances are messy to handle.

Companies would do better to create a separate mechanism that will provide for this employee need. Many companies I know, including multinationals would support the creation of a credit coop or a non-stock savings and loan association to serve employees' emergency financial needs.

If without a coop or an nssla, a company providing direct personal loans should really limit their exposure. A one month salary loan immediately deductible from the salary or separation pay will protect the company from unnecessary losses arising from opportunistic employees (who might borrow and disappear)!

My company helps business organizations create, set up, register, and run coops and nssla's! Call us should you need our professional services at .



Best regards.

Ed Llarena, Jr.

Managing Partner

Emilla International Consulting Services

Email: <emillaconsulting@hotmail.com>


Dear Rash77,

There appears to be big confusion in your company on "Salary Advance" and "Employee Loan". This confusion is a result of not having proper policy on salary advance or employee loan. The concepts are explained below:

Salary Advance: - Why do we give "salary advance"? Giving salary advance is a means of employee welfare. While running domestic activities, employees run short of money. To fulfil these domestic requirements, salary advance is given. Generally, salary advance is given for the number of days employee has worked in the month. For example, If employee asks for salary advance on 15th of the month, then HR checks the attendance and may disburse the advance depending on the number of days that employee has worked. No guarantors are required for salary advance. Therefore, company does not incur any liability as such.

Employee Loan: - This is also a employee welfare. Generally, it is given interest-free. In many companies, they have policy on employee loan. In this policy, criteria is defined on loan eligibility like number of years of continuous service in the company etc. Generally loan amount is recovered in three to ten instalments. Two guarantors are required to accept the liability for default. Again in this case also company does not have much liability. Yes interest is lost on some amount. But when you calculate, you will find it negligible. For the default on the part of employee to pay the loan, the amount is recovered from the guarantors.

Ex Gratia: - When there are natural disasters like flood, fire, earthquake, cyclone etc. or unnatural challenges like destruction of property in riots and when employee or employee's family members incur hefty financial losses, company may give some ex gratia amount. This is purely a philanthropic measure and goes beyond routine employee welfare. There is no fixed amount for the disbursement. This amount is not recovered from the employee. This amount is based on the factors like gravity of the disaster, length of the service of employee etc. Nevertheless, companies are wary of disbursement of ex gratia, as it could set trend among the employees to ask for ex gratia even for minor reasons. The second challenge is employees start comparing with one another. The last challenge is financial health of the company.



Replies to your other questions are given below:

What can be done if an employee needs more advance and doesnt have a security/surety to provide. What are the clauses that can be mentioned on an agreement/bond for employees who are working for more than a year and have no security to be provided?

Reply: - Disbursing loan without guarantee from guarantors is risky. Whether to take this risk or not is company's management's call. One way to protect interest of the company is to take a signature on the bond paper. But again whether this agreement is valid in the eyes of the law that needs to be checked from the lawyer.

Also, when we mention that the amount will be deducted from the final salary in case of resignation/termination, how about if the amount is more?

Reply: - If the amount is outstanding and if employees wishes to leave the company then employee can very well refund the amount and leave. Nevertheless, leaving employment is ungraciousness on the part of employee. When there was need he/she asks for loan to fulfil his/her financial obligations. Therefore, benignity demands continuation in employment at least till the loan period is completed.

how can the amount be recovered if he/she quits without intimation ? I am preparing an agreement for advances/loans for employees and was looking at what all clauses can be included.

Reply: - If employee quits company without intimation and that too without complete refund of the loan amount, then you may lodge a police complaint. However, to lodge a police complaint, you need to have proper legal agreement. In this agreement let the liabilities can be defined under contingencies like lock-in period of employment, abandonment of employment, liability of repayment in case of death of employee etc.

As a one time measure, get this agreement done from the lawyer. For future cases, same agreement can be used without involvement of the lawyer.


Thanks,

Dinesh Divekar


let me make an attempt to share my thoughts from and India Income Tax prespetive.
there is a difference between salary advance & loan.
1.any amount paid as advance and that is set up from the respetive months salary itself is treated as salary advance
2.any advance given to an employee which is paid off by the employee in instalments spread over time is to be treated as a loan & this is subject to perquisite tax as per applicable tax guidelines
Helping employees in need is a good practice subject to ensuring that the concerned employee doesnot take it for granted and in the end fails to pay.
some options that can be explored here arre:
1.it is important that as a policy the company decides on what is the max kitty of money that they will park a side for payout as loans to employees ( thus ristricting their financal risk)
2.bring in the concept of guaranters,where in any employee wishing to take loan needs to provide two guaranters ,who will be willing to pay off the default component of the loan in case of his/her failure to do so
3.Restirct the loan amount to a max of 2/3 months salary with payout terms not exceeding 12/24 months
4.set in a rule that no employee can avail a second loan during perdency of an existing loan
5.to ensure that pay out of loan to an employee is subject to ensuring that total deductions from an employees salary towards all kinds of loan( including external) does not go beyond 40 -50% of the take home salary.The loan amount to be sanctioned must he linked to this as well
6. set up an internal team of management & employees to manage the loan policy as thus be jointly accountable for it
7.appropriate documentation should be in place,just in case to ensure that in case of legal action company interests stand safeguarded

keeping in mind all point mentioned by you & taking into consideration some of the above points a policy document needs to be prepared and after due deliberations & modifications keeping in mind the culture framework of your organisation this has to be immplemented.Needless to say as HR professionals our objective should always be help/support employees but ensuring that organisation values are not compromised.

do let me know in case you need any specific supoort on this
Thank you everyone for your valuable inputs. I actually meant employee loans and not advance, regret for the inconvenience. We have introduced bond and also the concept of guarantors.
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