How can employers prevent or minimize requests for paycheck advances and employee loans?

If you have ever had an employee who asks you for a payroll advance, you know how difficult and even awkward such situations can become. You do not want to lose a good employee, but you also do not want to become a personal lender with all the entailed risks. And if the employee catches you off guard, you are much more likely to make a hasty and not-necessarily wise decision.

As an alternative to distributing blatant signs and mounting wall posters to indicate strict no-loan policies, employers can minimize payroll advance requests by identifying employees most likely to ask for them and offering preventative resources and assistance.

While we can’t promise you that the following employee actions are definite precursors to a request for a loan when considered individually, they should at least raise the boss’ consciousness of the possibility. By themselves, these signs may never even indicate financial troubles. However, if you notice an employee taking two or more of these actions within a brief time period, you can pretty confidently assume he or she is going through some serious financial struggles.

As an employer, company owner, or HR representative, stay on the lookout for these signs, listed alphabetically. When it comes to financial issues your employees face, despite them being “personal” finances, if they impact you, their work performance, or the company, they are no longer personal.

Downsizing a Personal Vehicle

While it may be a simple case of reshuffling priorities and learning to do more with less, an employee that trades down a nicer car or truck for a smaller, less luxurious, or less sporty vehicle may possibly be reacting to some financial struggles. Especially if his or her previous vehicle seemed above their income or pay level, the car downgrade may serve as an alarm bell that the employee could use some guidance. We don’t mean to suggest that you should prowl the parking lot looking for employees living above their means. After all, we Americans love our cars and trucks, almost considering them family. However, when you notice such changes, be aware also that a member of your team is probably struggling financially to stay afloat.

As with all conversations revolving around personal finance, keep the following questions and conversations between just the two of you. When the opportunity arises, you can ask the employee if he or she got a good deal on their new vehicle or why they decided to get another vehicle. Their answers may offer insight into whether they simply wanted a change of driving pleasure or if finances played a role.

Driving for Lyft, Uber, or Delivering for Amazon

What your employee does with his or her time after (or before) hours is truly their business so long as it does not interfere or compete with your business, right? That said, unless they really love driving, putting lots of mileage on their vehicle, and constantly meeting new (and sometimes grumpy) people, your employee that has recently started to earn money off-hours providing ride share or food delivery services is quite conceivably needing the extra cash to fix an underwater household budget. After all, they can make two to three times the minimum wage doing this part-time hustle with the flexibility of working the hours of their choice. If they don’t ask for a payroll advance or raise, they may be looking for more fulfilling or less stressful work.

Obsessing Over the Lottery

When PowerBall and MegaMillions hit record highs, a large percentage of your employees likely get excited about playing. They may even form pools to purchase large numbers of tickets. It is common, though never wise.

However, if you have a worker who constantly obsesses about winning the lottery, you likely have a worker that needs some financial education or counseling, or maybe just some coaching. At the extreme, your employee may have an actual addiction, although unlikely.

At best, they are wasting their money. After all, the average lottery ticket buyer spends over $1,000 a year on their obsession. With that kind of carnage going on in their spending, it would be a surprise if they weren’t struggling financially.

Opting Out of Your Company-sponsored Retirement Plan

If your company offers a 401(k) or 403(b), you have an incentive to increase participation for several reasons, from talent retention to tax deductions. Losing a plan participant may indicate more immediate financial problems in the employee’s household.

With the understanding that your employee may have opted for opening and funding an individual retirement account outside your company, preferring to direct his or her own investments, losing a plan participant may not signal the end of the employee’s financial world. This may be the case, especially if your organization does not provide any contribution match.

However, retirement plan withdrawal can more often indicate that the employee needs that extra $50 to $500 a month back in the paycheck to cover recently incurred purchases or additional bills. This could especially indicate financial challenges if the employee or a member of their family has experienced medical challenges recently, leading to overwhelming medical debts. On its own, you might even consider medical debt as sign #8.

Plasma Donations

Whether they speak about their experience at a local plasma donation center aloud or you notice that they are showing up at work twice a week with a colorful bandage wrapped around their arms at the elbows, your employee is likely “earning” money by donating plasma. Is this a serious issue for you to worry about? Maybe. Maybe not.

However, consider that the employee takes between 50 minutes and 2 hours of personal time to lay on a donation “bed” to get poked with a needle, tapped for whole blood and resupplied with the non-plasma components for the equivalent of 3 to 10 hours of the minimum wage. And they are probably doing this twice a week.

Plasma donors can make good, tax-free money. They don’t do it because they love needles, enjoy physical discomfort, and appreciate long-term scarring that can occur on their arms. For someone struggling with bills that won’t be covered by their paycheck, however, an extra $50 to $100 a week or more can be a huge motivator.

Receiving Collection Calls at Work

This one seems like a no-brainer. If you hear of or notice an employee taking phone calls from bill collectors while on company time, you not only have an employee struggling with his or her personal finances at home, but you also have a much less productive employee at work.

As an employer, you should know that third-party debt collectors cannot contact your employees at work if the employee verbally tells the collector such calls are not allowed. If the collector continues to call, you and the employee should, according to the FTC, report the collector to your state’s attorney general’s office, notify the Federal Trade Commission, and submit a complaint to the Consumer Financial Protection Bureau.

Seeking Financial Advice

Just because your employee asks for your thoughts about financial matters does not necessarily mean she or he is teetering on a financial cliff. However, combined with others below, this sign should serve as a warning to business owners and HR administrators that you have an employee experiencing financial stress or, worse, chaos.

That said, if you hear your workers talking about or if an employee asks your opinion about high-risk investments such as bitcoin, about outright scams like purchasing foreign currency or securities, about the latest multi-level marketing fad, or even online social lending sites like LendingClub.com or Prosper.com, you may have an employee or two looking for a quick fix to some financial problems. If he or she cannot figure it out soon, a paycheck advance may be their next thought.

You have plenty on your plate to worry about as a department or business leader. Probably for this very reason, most leaders avoid getting involved in their employees’ personal finances. Keep in mind, though, that finances are only “personal” if they remain so. Once an employee starts asking for payroll advances, seeking personal loans from the company, or using work time to deal with bill collectors, his or her financial issues also become your financial issues, like it or not. Preventing these issues from reaching a point that negatively affects the company should concern all business owners.

If you already find yourself at a point where an employee has asked for an advance or loan, check out our previous blog on payroll advances and financial education ideas.

Related Questions

Can an employer get in trouble for providing payroll advances in cash?

While you should seek the counselor of a certified tax professional, you should consider a paycheck advance as taxable unless you make it a legal obligation to repay. Cash out of your wallet to help your employee is taxable. A loan tied to a written repayment contract may not be taxable.

Can employers automatically deduct payroll advances from the employee’s paycheck?

Employers need to proceed with caution and with the advice of a qualified payroll professional before deducting payroll advance repayments from an employee’s paycheck. For example, if the deduction lowers the employee’s pay to less than minimum wage, the employer could incur penalties.