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Employee Payroll Advances: When Are They Appropriate?

written by: •edited by: Michele McDonough•updated: 5/20/2011

As a business owner, you may be asked by your staff if they can have an employee payroll advance. Is this a good practice to follow and are they appropriate to offer? Jean Scheid, a veteran business owner discusses payroll advances with tips on making the right call.

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    Every business owner has been presented with the question, “Can I have an employee payroll advance?" This question is always followed by some sob story or true need on why the employee is asking for the advance. The key to allowing payroll advances is setting a policy, adhering to the policy equally, or not allowing them at all.

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    To Advance or Not to Advance

    Dollar Bills by Alvin Morgue File As a business owner of more than one company for over 16 years, I have a set policy in place as far as employee payroll advances. I find most of the time, the advances requested are truly needed to pay a utility bill, buy food or use a company service and pay for it out of the next pay check. On the other side of that equation comes the employee who doesn’t really need the advance but instead, is looking for play money for the weekend or to keep their lifestyles up to par until the next payday.

    These are really the only three types of payroll advances out there. I’m not speaking of recruitment advances or relocation incentives. True employee payroll advance requests fall into one of these three categories and it’s tough to make a decision on whether you should offer them or not.

    Image Credit: Dollar Bills (Morgue File)

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    Reason to Allow Them

    Most employees won’t ask for a payroll advance unless it’s truly necessary. There are times when unexpected expenses such as healthcare or vehicle repairs come and by taking money out of their pockets to pay these expenses, there is nothing left for food or utilities.

    In cases such as these, when an employee and their families have run out of money before the next payday due to unexpected expenses, I do think that employee payroll advances are appropriate, based on certain conditions.

    • Paying a Late Bill – If the employee requests money to pay a late bill such as a credit card, utility bill, rent or mortgage payment, as an employer, it’s best if you pay the late bill directly for them. It is perfectly legal to do this and all you need is the amount, account number and the payee. If an employee won’t allow this, skip the advance.
    • Needed Services – If your business is one such as mine (a car dealership) that can offer services or products for needed items, it’s also a good idea to allow the service or offer the product with the understanding that the employee will either pay in full through a payroll deduction or make equal payments if the advance is large.
    • Food or Other Essentials – Some employees fail to budget correctly and find money for food or other essentials such as school supplies or school events can’t be paid for when needed. In this instance, I always keep some store gift cards on hand, specifically for Wal-Mart where the employee can purchase food or needed essentials for their family. At payday time, the amount of the gift card can be deducted in full or part from their paycheck.
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    Reasons to Deny Them

    Gift Money Morgue File There are some circumstances where I will deny the request for employee payroll advances:

    • Medical Expenses – While this sounds harsh, I do offer healthcare benefits and almost every hospital or doctor will allow payments if necessary. Most employees don’t ask upfront if they can make payments on medical expenses, so inform them of the process and skip the advance.
    • Entertainment – Sure your employee might want to see their favorite NFL team and tickets are just out of their reach, but it’s not your responsibility to pay for their after hour activities.
    • Party Advances – If an employee requests a payroll advance for a wedding party, baby shower, wedding shower or other party event, this is also not your responsibility, so again, skip the request.

    Image Credit: Gift Money (Morgue File)

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    Summing Up Payroll Advances

    There are times when employee payroll advances may be appropriate and times when they’re not. To approve or deny payroll advances is totally up to the business owner. If you do allow payroll advances, make sure you state specifically, in writing, in what circumstance a payroll advance will be allowed. Finally, if you do follow a payroll advance policy, make sure it’s fair—meaning all employees, regardless of position have the same opportunity to receive and pay back the advance.

    Remember, if you allow too many payroll advances and set up account receivables for each employee, you may not end up getting that money back if you are not diligent in collecting it. Make sure your employee handbook also states if the employee leaves the company for any reason, if they owe the company money, the entire amount will be deducted from their final paycheck.

    If you feel you are constantly being asked for payroll advances, why not set up an employee budgeting seminar? This will cost you less money than trying to recoup money from employees who may have excuses why the money they owe you can't be paid back.