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Salary Advances and Loans: The Employers Perspective

Unexpected things can happen to anyone. An employee might run through a financial rough patch, like a medical emergency, which may require more capital than the worker has saved for the rainy days. If such a situation arises then the worker might ask the employee for a salary advance so that they can make ends meet. This kind of situation is seldomly witnessed by employers. That is why it is crucial for the employee to consider a few things before giving payroll advances or loans. 

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Difference Between Loans and Salary Advances 

Salary advances mean paying a worker a part of the salary in advance. This advance salary is recovered by the employee in installments and usually are interest-free.

On the other hand, a loan is provided by the employee at a concessional rate of interest which enormously differs from the market rate of interest. The loan can be for things such as education loans, house loans, or vehicle loans. That is why the amount of the loan can be huge. The difference between the market rate of interest and the concessional rate of interest can give immense relief to workers endeavoring a loan.

Nonetheless, the difference in the market rate of interest and the company’s rate of interest on the loan is a taxable perk which is in the hands of the worker.

Create Policy for Salary Advances and Loans 

A written policy for salary advance and loans can assist a lot in understanding the eligibility criteria. Also, it can help in setting a uniform process for workers on how to apply for salary advance or loans. This policy will give workers the advance notice regarding what to await while applying.

The written policy for salary advance and loans must have some specifications while defining eligibility criteria. Also, it will assist to apply in a non-discriminatory process across the board. 

A written Agreement is Must for Loans and Salary Advances 

Written agreements are a must before sanctioning a loan or salary advances. The agreement ensures the obligations and protects the employee and employer from possible legal issues that may arise in the future. 

The agreement for salary advances or loans should incorporate the worker’s name, the amount of salary advance or loan, and the date on which the fund will be given to the worker.

 

The agreement should include a payback schedule. Also, a section should be included on how to receive the funds if the worker is terminated. While filling the agreement form, the signature of both, the employee and employer with the date is a must. 

Charging Interest on Salary Advances or Loans

An employer can charge interest on the salary advances or loans. But the amount of interest charged should be reasonable. Because according to the laws, an organization cannot benefit from this transaction. So, the employer must be careful about charging the amount of interest in salary advances and loans. 

Conclusion

Salary advances and loans are something that employers need to have information about. Join the Compliance Prime webinar to know more about policies for salary advances and loans.

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