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.:. Proceed with Caution: Employer Loans to Employees, Part 1

What do you do if you're approached by an employee for a loan or an "advance"?

Employment and borrowing relationships don’t mix. Lending money to employees can cause many problems, including souring the employment relationship. On the other hand, refusing to lend money to an employee can inflict the same amount of damage.

Here’s how to respond when employees put you on the spot and ask for “advances.”

Avoidance techniques. Lending to employees is full of danger. The loan may be paid back late or not at all. Terms of the loan may be misunderstood. The parties can stop communicating and the relationship can sour for all sorts of reasons.

So what do you do when you are approached for a loan or an advance? Offer to provide information instead. Offer to take time and discuss with the employee the need for the loan. Offer to help look for loans from a bank, mortgage lender or elsewhere.

Consider offering the employee a gift. It’s cleaner and easier. Further, you can justify offering the gift for a much smaller amount than the employee is asking for as a loan. You can justify it to the employee by saying, “That’s all I have to give right now.” Finally, after you’ve made the gift, close the door to future gifts or loans. Tell the employee, “Now that I’ve given you a gift, that’s all I have to give, so please do not ask me again.”

Suggest borrowing from third parties. Explain to the employee that borrowing from an unrelated third party might make everyone feel more comfortable than borrowing from the employer.

If you do decide to make a loan … see an attorney first. Some issues to discuss are written documentation, terms, forgiveness of the debt upon termination of employment, and so on.

Do you have questions about employee loans or compensation issues? Schedule a trouble-shooting meeting with Phil Glasscock by calling 480-941-4359, or email jpg@jpglaw.com.

 

 
 

J. Phillip Glasscock P.C.

13430 N. Scottsdale Rd., Suite 106

Scottsdale, AZ 85254

480.941.4359 • info@jpglaw.com

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