Lending money to employees can cause problems for employers

Many small business owners loan money to employees who run out of money before payday or who have unexpected expenses or crises. The risk that patrons face is not being reimbursed.

Marcelo Melamed made several loans to a staff member who said he needed money for things like fixing his car. Then one day, the employee disappeared and left behind a debt of nearly $800. Helping staff members is important to Melamed, owner of Stor Furniture in Old Bridge, New Jersey, but, he says, experience has taught him, “you have to be careful.”

There may be other issues related to lending money to employees. Owners may be willing to lend employees to help with big purchases like new cars, but not for vacations, which irritates some staff. And unless they specify how they expect to be reimbursed, owners may find themselves waiting and wondering about the staff member’s intentions and plans.

Many owners deduct money from employee paychecks until the loans are fully repaid, eliminating uncertainty as long as the employee stays with the business.

Matthew Ross, co-owner of Slumber Yard, a mattress review website and YouTube channel, and his partner Jeffrey Rizzo recently gave a longtime employee a $15,000 loan to buy a new vehicle. They also loaned another staff member $10,000 for a down payment on a condo. Loans are interest-free and payments are taken from paychecks.

“It’s a big financial risk for my business partner and I, but we think keeping our employees happy is one of the best things we can do for the overall health of the business,” says Ross, whose company is based in Reno, Nevada.

At this point, with 12 employees, there is no formal written process for loans at Slumber Yard. But as the company grows, it may need it, says Ross.

Homeowners need to think about the reasons they are willing to lend money, such as hardship or essentials like cars and homes. And, what constitutes a test. Creating a written policy can help a company avoid complaints and resentment when one member of staff gets a loan, for example, for medical expenses, but another cannot get a loan for travel. In the Caribbean.

What if the staff member with a loan leaves and there is an outstanding balance? The owner could face a loss, says Rick Gibbs, a consultant at human resources provider Insperity.

“Getting money back is tough with most labor laws,” says Gibbs.

Some owners may want to help their employees, but are reluctant to lend them money. An alternative is to help them find financial resources, says Gibbs. He noted that some employee assistance programs include services to counsel staff members who are cash-strapped or struggling with unpaid bills.

Troy M. Hoffman