How to Address Loan Non-Payment in an Employee Termination Letter?

There is an employee who took a loan from the company 2-3 years ago, but has not repaid it yet. We are considering terminating him based on the grounds that he has failed to make the loan payments. How should I address this in the termination letter?

Dear friend, first and foremost, you need to tell us whether you have a policy on the disbursement of loans to the employees. In case you do not have such a policy, then did you make any agreement on the method of returning the loan? If you have not made this agreement, then you have increased your trouble because of a lack of documentation.

If the loan was given to the employee, then from the next month onward, the installment gets deducted. Are you deducting the portion of the loan? If not, why?

Did the employee agree to pay the entire amount in a single installment? If yes, and if he has failed to do that, then what kind of correspondence have you done with the employee? What is his justification for non-payment of the loan? You may terminate the employee; however, before that, it is better if you conduct the domestic inquiry. Let the facts be established properly and then take disciplinary action.

Thanks,

Dinesh Divekar

Termination Due to Non-Payment of Loan

First of all, please tell us what you want from us: a draft of a letter terminating an employee or advice on whether you can terminate an employee for non-payment of a loan to the company? If the first is your choice, then you may write to the employee stating that since they have not paid back the loan, they are hereby terminated from service. Anyway, they are going to face the consequences of termination, and that they should face.

If you are okay with the second one, we have the following advice based on certain questions.

Questions to Consider Before Termination

Have you ever communicated this matter to him? What was the arrangement when he was given a loan? Was there any arrangement that the amount would be recovered from salary in installments? If yes, why didn't you recover it from his salary? If there were no such arrangements but the loan was given with an understanding that the employee would pay it back once he gets some money from other sources, have you requested him to pay it back at least once in six months after it has become overdue? If the answer to the above is No, then it is your fault that you did not take the initiative to recover the amount advanced.

Options for Recovery

Now, the only option available is to give him a letter stating that an amount of Rs..... is overdue and the same should be paid back in..... months, failing which legal action as deemed fit shall be taken against him.

Here, the time that you should give should equate with the amount involved and the salary and other income of the employee. Obviously, you should give more time to an employee whose monthly take-home salary is less and where the amount involved is huge. You can also think of salary deduction. Terminating without giving him an opportunity to be heard is unfair.

Dear Colleague,

It appears that you do not have a policy and system for the payment of loans to employees and the recovery from their salaries. I fail to understand how terminating an employee's service can be considered a solution for recovering defaulted loan amounts.

Regards,
Vinayak Nagarkar
HR Consultant

Loan Recovery from Salary

Regarding our elite members, the option to follow has already been provided. There is not much left to suggest because you have kept all the doors shut.

Now, you are being informed that since the employee has not repaid the loan, the management has decided to deduct/recover the loan amount from your current month's salary in 2/3 installments. This decision has been made by the management as you have failed to return the loan amount despite several verbal requests. If you have anything to address regarding this matter, please contact us with your written proposal within the next two days. Otherwise, it will be treated as your consent.

Thank you.

Dear friends, I concur with all the members regarding their suggestions on recovering the loan amount from the defaulting employee. However, I would like to approach this issue from a different perspective. In this monetary transaction, the company and its employee, who already have the contractual relationship of employer and employee, have entered into another contractual relationship of debtor and creditor. Besides, I don't think that the entire loan transaction, by way of its sanction and long-pending recovery, falls within the parameters of "loans and advances to employees" provided for under any establishment-specific labor law applicable to the establishment/company or the Payment of Wages Act, 1936.

Legal Empowerment of Employers

Therefore, my question is whether the contract of employment would legally empower the employer to initiate disciplinary action against the employee or terminate his services for failing to repay the loan obtained by him. Unfortunately, in this situation, it is not legally possible as the employer stands only as a creditor and the employee as a defaulting debtor. It is better that the management tries to sort out the issue amicably or institute a civil suit for the recovery of the loan amount. If the decree is in favor of the company, it can ask the court for periodical recovery from his salary.

Questions Regarding Loan Disbursement

How big is your organization? Under what circumstances was a loan given to him? What were the terms and conditions of the disbursement of the loan? Was any promissory note taken from him? Is he a workman or is he in a supervisory and managerial level? Why did you not recover in installments? Who sanctioned the loan?

I can add a few more clarificatory questions before giving any legal and strategic advice on this subject. Recovery was the responsibility of the employer, and if the employer has not done so for three years, what was the reason?

Thanks,

Sivasankaran

Dear Anonymous,

There is not much to add after respected seniors already shed light on the issue. Also, I don't know if you are a financial institution or not, but in either case, shutting down the source of income of an employee from whom you want to recover some amount is not wise. Instead, you should ask him to pay the said amount in regular EMIs from his salary. That way, you will be able to recover the amount as well as retain the employee.