Paycheck Advances: How Employers Can End Them For Good

Dear Executive,

Where does your job description does it say that you are the personal lender to your employees?
Where does your mission statement does it read that your organization is obligated to advance your employee’s paychecks regularly?

How often have you felt like a banker instead of an executive at your work?

Unless your organization is actually a bank, credit union, or lending institution, you most likely wish that you could answer “nowhere” and “never” to the above questions. The unfortunate reality is that many employees, often due to unexpected medical or vehicle expenses, feel a pay advance is their last remaining option. Of course, you are not obligated to provide such loans, but you generally care about the well-being of your employees and understand the financial burden that they might be under. And if the employee asking for the advance is one of your better-performing employees, then certainly you want to help and keep them with your organization.

What is an executive to do?

There is no single right answer to this dilemma.  That said, here are a few ideas to consider:

• Have a pay advance policy in place and in writing before emergencies happen. There are plenty of templates online to give you some ideas, but make sure that the policy fits your organization’s values and culture.

• “An ounce of prevention is worth a pound of cure.” We all know this, but when it comes to money, there are too many who fail to equate emergencies with failure to prepare for emergencies. Yes, there are emergencies that require far more money than any household could reasonably be expected to have on hand or in savings. Still, building a $500 or $1,000 savings balance would eliminate the need for most payday loans in this country. Such preparation would minimize the impact on household finances of a vehicle repair, an emergency room visit, and even a refrigerator that has stopped working. Statistics clearly show that only a minority of American households are prepared for such emergencies. So, what can you, as an employer, do about it? You can’t be expected to schedule oil changes for your employees, make their doctor appointments, show them how to avoid physical harm, and save for their next refrigerator, right? Probably not. That said, providing employees with incentives (or at least encouragement) to take basic financial education and turn to qualified financial counselors when in need is an easy move for you. Financial wellness posters in the lunchroom can be welcomed relief from the government mumbo jumbo you are usually required to post.

• Give more than just money. Provide leadership. Some employers feel money is too personal and want to avoid appearing to give unwanted advice. If such is your perspective, then this can be an opportunity to lead by example. There is absolutely nothing wrong with you mentioning something like this during casual conversations that might revolve around spending or purchases: “You know, I came across a great little personal finance website recently that had some really good, practical ideas and tools for paying down debts, building credit, saving money and stabilizing household spending.” Yeah, I know. That would be a ridiculous mouthful. But, you get the point. “Hey, I was on this site last week that I thought was pretty cool.” When employees hear that their boss is on a personal finance site, that immediately tells them, first, that you believe personal financial responsibility is important and, second, that you know of some resources they can ask you about before they need a loan.

• Give more than encouragement. Give expectations. I have been impressed by organizations I have worked with in the past that got to the frustrating point of seeing many employees repeatedly living 2 weeks ahead of their earned paycheck. To help break the cycle of payroll advances, some organizations brought me in to do some free lunch ‘n’ learns on spending plans (aka budgets), debt reduction, credit building, and healthy spending behaviors. Other organizations take advantage of our free financial webinars and their corresponding “certificates of completion” to verify that the “repeat advancer” is doing something to learn how to better reduce their dependence on your advances and live below their means.

Of course, if your organization provides health insurance to your employees, you are already offering a great benefit to help out. Recent studies are finding that employees with high health insurance deductibles are just as likely to have medical-related financial troubles as Americans who don’t have insurance at all. There is some financial food for thought.

Undoubtedly, there are large numbers of employees who truly need financial help due to unforeseen emergencies. Getting through an unexpected illness or injury, an accident, or even the loss of a family member might require your financial assistance as their employer.

The reality, though, is that there are many Americans who would rather go into debt, receive some sort of government assistance, or even ask their employer for a pay advance rather than change their lifestyle choices, regardless of how high or how low their income appears to be. Evidence? Try to harmonize these two conflicting statistics:

More than 50% of American schoolchildren receive taxpayer-subsidized free or reduced lunches due to low household income

Yet, more than 75% of American households still pay for cable or satellite television services

This is just a one-way indication of our financial priorities issues in our country. We all have financial challenges and tend to justify spending on what others might not consider a priority.

We could all use a financial realignment from time to time.

Regardless of how or why your employees might get into financial troubles in the future, your goal should be to help prepare them as much as possible. Troubles will happen. That is life. It just does not have to be your life every time it happens to your employees. Find a financial wellness program that offers practical, everyday money counseling and tools for budgeting, getting out of debt, building (or rebuilding) credit, and figuring out how to reduce poor spending behaviors.

After all, caring for your employees and making sure they thrive actually should be part of your job description as their leader.