Times are tough, and especially in a small business co-workers sometimes begin to feel more like collaborators than employers and employees. So, what should you do when an employee comes to you with a request for a wage advance?
As with all legal questions, the answer is that it depends. You could say yes, or you could say no. There’s never a requirement to do this, so practice saying no if you need to. You could do it on a handshake or have your employee sign a promissory note. You could structure the repayment as a lump sum, a regular paycheck deduction or a regular deduction with a balloon payment if your employee leaves before everything is repaid. Perhaps it’s not so much a loan as prepayment of vacation time or repayment of a paycheck that was in error. And you could be doing business in New York, California or Texas.
First, here are some general principles. Your policies need to be consistent, public and in writing. There is no reason for you to find yourself being accused of a discriminatory practice because you tried to be nice. If you care about being repaid (and you should, at least in part to protect yourself from charges of favoritism) you will have your employee execute a promissory note drafted in accordance with the law where you live. The legal issues for employers are largely about how to get the money back.
What to do in New York
After several years of turmoil, it is now clear that Section 193 of New York’s Labor Law permits employers to make paycheck deductions for inadvertent overpayments or wage advances to employees. Before the advance is given, both parties must agree in writing to the amount to be advanced, the amount to be deducted (both in total and per wage payment), and the dates on which when each deduction will be made. The employee may not revoke the written authorization after receiving the advance, but may contest any deduction not made in accordance with the agreement. As an alternative, both parties may also agree to a separate repayment arrangement. The employer must, however, agree in writing that the employee's failure to make the agreed upon repayment will not, in any way, result in any form of disciplinary or retaliatory action.
What to do in Texas
The employer and employee should execute a written agreement listing all the particulars of the transaction, such as amount loaned or advanced, date of transaction, full name and social security number of the employee, the amount and frequency of repayment installments, and what happens to an unpaid balance remaining when the employee leaves the company. Texas employers should be alert to possible conflicts with minimum wage or overtime laws. The principal of a loan may be deducted from the employee's wages, even where such a deduction cuts into the minimum wage or overtime due under the Fair Labor Standards Act. Deductions for interest or administrative costs on the loan or advance may not cut into the minimum wage or overtime pay.
What to do in California
When authorized to do so in writing, a California employer may take payroll deductions in repayment of a salary advance, overpayment or unearned vacation pay. The agreement should specify the purpose of the deductions and the periodic dollar amount.The deduction may not reduce the employee's pay to below minimum wage. The interesting wrinkle in California is that if the employee quits, an employer may not recoup the outstanding balance in a balloon payment from the last paycheck. The most an employer may take is one agreed upon regular installment. An employer obviously needs to think about some kind of backup plan to cover this situation.
Lending an employee money is always a slightly dicey prospect, but sometimes it makes sense. If you choose to make salary advances, make sure to have written policies and agreements to ensure that the arrangement is nondiscriminatory and enforceable.