Nasir and Matt discuss the trend of employers providing loans to employees and answer the questions, "I know I need to pay some of my employees more to prevent them from leaving but I won't have the revenue for another 6 months, what else can I do to keep them in the mean time?"
NASIR: Welcome to Legally Sound Smart Business.
This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: And welcome to our podcast where we cover business in the news with our legal twist and also answer some of your business legal questions that you, the listener, submits to email@example.com. I wanted to slow it down there for the listeners writing it down.
MATT: It sounds too candid at this point. I feel like you sounded like a robot. I mean, your voice isn’t robotic but it sounds like a recording almost.
NASIR: I do. I just play a recording at the beginning of every episode. I don’t even record it live.
MATT: Yeah, those five seconds that you spend, it’s really taxing. You want to save your voice for the actual substance of the episodes.
NASIR: Exactly. You understand me.
MATT: So, speaking of the substance of the episodes, I do want to get into the story for today because I think we might have some differing views. I don’t know why I think this but, reading through it, I just thought we did for some reason.
We’re talking about workplace loans. This primarily deals with employees that are living paycheck to paycheck. What it is is more or less what they can be labeled as a short-term, high-fee loan.
You know, an employee needs some money and the employer is lending them this money. The only problem being for the employee is these extremely high interest rates in the fees that are being involved. I think in one study they said the effective annual percentage rate attached to the loan is 100 percent to 165 percent. In my opinion, this is just digging them into a bigger hole. I mean, I understand that they need the – well, it’s not an advance – the loan but, at the same time, I feel like you almost get situations where employees are taking these loans out to pay their previous loans or maybe they went through some third party in the past and they’re paying for that.
NASIR: Yeah, and I think we talked about how most people seem to live paycheck to paycheck, whether they’re low-wage workers or not. But let’s compare this to wage advances and I think we answered a question regarding that a while back. I think this is a little bit different because, in a wage advance, the employer is basically giving the loan themselves and there are all these rules regarding that – like, for example, in New York, you have to have it in writing, especially if you’re going to be withdrawing any money from their weekly paycheck or biweekly paycheck. In California, there’s restrictions – like, if it’s the last paycheck, then you can’t withdraw any money from that and you can’t terminate an employee – and I think this is both in New York and California as well – you can’t terminate an employee because they don’t pay back the loan, for example, if it’s not deducted from their paychecks. Those are some issues with that.
But this is different because we have third-party payday lenders that are working with employers and, now, I hear you. Of course, these payday concepts, they have high interest rate and, frankly, what other loan are you aware that automatically all of a sudden they can garnish your wages?
For example, if you default on another loan, then they have to get a judgment and then take that judgment into your workplace and actually attach it. that requires some kind of effort. This is a little bit different. All of a sudden, your paycheck could be garnished from the get-go.
MATT: Yeah, to me that’s a problem. I just don’t know what the solution really is for these people that need that. I guess the problem I have is with the employer. They’re the ones paying the employees, obviously. And then, if they’re going to act as a lender, it’s two different hats they’re wearing. I mean, that’s two very separate things. I would think it’d be easy to kind of group those two things together. In my opinion, you need to keep those two different things separate if they need a loan.
NASIR: You said we might disagree on this subject. Here’s the other argument. These lending trees and whatever the other businesses out there that do these payday loans, people have been complaining how bad those are but, really, these kind of products are supposed to be an alternative to that in the sense, okay, you’re complaining about the industry. They’re actually less than the market in some of these things. Also, they couple that with kind of teaching financial responsibility, et cetera. That’s the argument but I think you and I both agree that there’s something wrong, especially what was it? Sonic that’s doing this, right?
MATT: Yeah, that was the example.
NASIR: When you have low-wage workers that are going through that, there’s just something inherently wrong with when you have loans to your workers that obviously that you’re paying them and they can’t afford a living wage where they need to take a loan. Yeah, things happen once in a while but, if people rely upon this on a reoccurring basis, there’s just something that doesn’t feel right about it.
MATT: Yeah, and now I’m upset that I said that at the beginning because we don’t disagree with this. I don’t know why that’d be the case but the employee that’s in this position, I’m not really sure what they can do though.
NASIR: Yeah, what’s their alternative?
MATT: But they have to do it then. I guess they do. Because, like you were saying, the payday loans and one of the things here, they’ve been banned in Arizona for a few years so that’s not even an option but I guess that’s the other option or just get a loan from a family member or friend.
NASIR: Yeah. From an employer perspective, whenever our clients ask us about a wage advance or even doing a loan like that, I just never think it’s a good idea. One is I think, if you do that, you should be very wary because you can get wrapped up into a discrimination lawsuit or another kind of labor law violation. Because you have this side deal with your employee, then it could be construed in different ways. And what if they don’t pay? Now the relationship is all bad. It’s just kind of trouble waiting to happen besides the actual compliance of it all. And then, adding on top of that this aspect of dealing with these other third parties with the loan, I suppose, if they’re fair loans, then maybe, but I just don’t know if that’s the case.
It kind of reminds me of these companies that bring in health experts to make them exercise more and so forth and that makes sense, right? when you have a thousand or thousands of employees, the healthcare workforce, especially if you’re self-insuring makes sense. But, if you only have a few, maybe not. In the same aspect of financial responsibility, if you have thousands of employees, you have a more efficient workforce. But, if you only have thirty or forty and you’re giving these loan products that may not be advisable to them, I don’t know how that’s a benefit to your company.
MATT: Yeah, I’m just thinking about Sonic.
NASIR: Yes, Sonic doesn’t have an advantage of making them happy because most of those workers are not going to be there on a long-term. I feel like there’s something wrong with that. I don’t know.
MATT: If it’s the employees of the Sonic that was in my hometown, then they’re definitely not there because they shut that one down for some reason.
NASIR: Probably because all their employees defaulted on the loans that they provided them.
MATT: I always thought it was a huge liability issue, for those of you who have never been to Sonic, it’s the old-fashioned you pull up in your car and they come to you and you eat in your car, but all the employees are on roller skates. I feel like, if you’re carrying a whole tray of drinks or food, there’s just got to be some bad situations that have happened there but now we’re getting off-track.
NASIR: Yeah, I know but I’ll tell you that’s a difficult job – being on skates and serving food in the food industry.
MATT: Let’s get into the question of the day.
“I know I need to pay some of my employees more to prevent them from leaving but I won’t have the revenue for another six months. What else can I do to keep them in the meantime?”
That’s from a coffee shop in Santa Barbara.
NASIR: Poor coffee shop owner because how are you going to keep an employee without paying them? Let alone do it legally. How are you going to do it in a way that your employees are going to be willing to do so? I mean, this isn’t a startup company where it’s like, “Oh, okay, we’ll look over the fact that you’re not paying me minimum wage against labor law violation,” in the hopes of being something bigger but a coffee shop? I don’t know.
MATT: I guess the answer is just to give them unlimited free coffee in the meantime.
NASIR: That’s true. If you pay them in coffee with an equivalent amount of minimum wage, then I suppose you could get away with that from a labor law perspective, I suppose.
MATT: If you work at any place that has food or drink or I guess clothing spots and things like that too, there’s always the perks that you have with restaurants but, I mean, in this situation, it is tough because, like you were saying, it’s not like these people are in on the ground level of some startup and they’re hoping it’s going to succeed and they’re willing to stick around. We’re talking about employee retention for when you have people that you know should be getting paid more and maybe can go find another job where they get paid more but you have to give them reason to stick around. So, I think another common theme of this podcast or culture.
If it’s an enjoyable place to work, even if you’re not paying them as much as they might be able to get somewhere else, they’re going to be more inclined to stick around. I know I personally have stuck around with a job where I was getting paid nothing or very little. I knew I could be paid something more but I just liked the job and I liked the people and I guess that may be one way to kind of do this but coffee shops can sometimes have bad hours if you have to wake up and work from 5:00 a.m. to 2:00 p.m. or something.
NASIR: Even then, you still have the risk that your employees are going to turn you in. People do this all the time and, just to hit the point home, I don’t care if you’re a startup company or a coffee shop, your employees have to be paid minimum wage. Whether you’re doing that through cash or through other means, by issuing them a stock in a company in your startup that’s not worth anything is not minimum wage – just to kind of make that very clear. It’s a very common mistake that can really haunt you later maybe down the line. Right now, maybe your cofounders and your other employers are happy but what if things go awry? It’s going to really cause a problem.
MATT: Yeah, it just might be a grind for them but you really hope they won’t spill the beans.
NASIR: Oh, I knew you were getting to something. You were gearing up. You were about to reel something in and then came right through.
MATT: Yeah. That pun wasn’t your cup of tea.
NASIR: Oh, man.
MATT: I could tell.
NASIR: Oh, gosh. You’re pretty good at these. You should go on a different show and do that and maybe not this show.
MATT: Legally Sound Smart Puns. It’ll be a spin-off of this podcast.
NASIR: I wish you success.
So, that’ll be our last episode with Matt.
MATT: Yeah, I think that’s a good spot to end it.
MATT: Hopefully we answered the question.
NASIR: I think so. Just basically pay a minimum wage. If you can’t, then you have to close business or get a loan to pay them. That’s the bottom line.
MATT: There you go. Maybe they can do a reverse of what Sonic is doing and the employees can loan the employer money.
NASIR: Absolutely. That’s a good idea. Do that.
MATT: Don’t do that, though.
NASIR: All right. Have a good week, everyone!
MATT: Yeah, and keep it sound and keep it smart!