It is becoming more commonplace that employers are offering loans to their employees, whether that be through funding education or offering short term loans to aid a particular situation outside of work.
Whilst it would be a wonderful thing to do everything on good old fashioned trust, unfortunately sometimes things can turn sour and if there’s nothing written down regarding the loan in terms of the amount loaned, and repayment terms then you can land in a sticky situation.
There will be more than one person out there who has had their fingers burnt in a situation just like this where they’ve ‘thought someone else documented it’ but when an employee decides to leave and there’s nothing on paper, you have little chance of getting your money back.
Typically you will see two types of loan in the workplace; the first being educational based learning agreements and the second, perhaps previously less common, for salary advance loans.
Why put loan details in writing?
This is imperative so that all parties know where they stand and there is a documented agreement in place regarding the terms of the loan and repayment.
For learning agreements, best practice is to document the key details which usually include:
Individuals name, job title, details of the study course, the fees associated and the timeframe for the course.
For any such agreements, it is also important to clearly state that the financial assistance will be repayable if:
the individual leaves the business within a defined period of completing their studies;
leaves the business before completing studies; or
voluntarily stops with their studies.
Repayment for educational learning agreements usually is calculated on a sliding scale, whereby a particular percentage is repayable at particular points, on a sliding scale over a defined period, usually the first two years. The sliding scale acknowledges that the business will have gained some value from the education during.
For salary advance loans, it is best practice to have a process in place, following any informal approach, for the request to be made in writing and if agreed, this should be confirmed in writing detailing the individuals name and job title, the amount of the loan, time frame for repayment.
Usually these type of loan requests aren’t for vast amounts however it is important to make clear the terms of the loan and the repayment terms in particular i.e. through a set deduction from salary/wages each month and over what time frame, including when deductions will commence. It’s really important to clearly state that settlement in full of any remaining outstanding balance will be payable upon leaving the business if the loan has not been repaid and will be deducted from the employees final pay and you should make clear what this will include i.e. salary, holiday pay, overtime, commission and any bonus payments. Both parties should sign a copy of the agreement and be kept on the personnel file.
It is important to note that Section 13 of the Employment Rights Act 1996 makes it unlawful for an employer to make deductions from an employee's wages unless the employee has given prior written consent, or a relevant provision exists to this effect in the employment contract.
This is where the agreement becomes important, without it you can find yourself in a tricky employment law situation. It is also worth revisiting your contract of employment to ensure that you have expressly stated that the company has a right to make deductions from the employees salary for various purposes, including the repayment of any outstanding loans.
What if their final pay doesn’t cover what they owe?
Should there be insufficient funds in the employee’s final pay to recover the total loan amount outstanding, the written agreement should include a requirement for the employee to make a separate payment to the organisation within a set period of time after termination of the employment or to repay the outstanding amount in line with an agreed schedule with the employer.
Whilst unlikely, the agreement should also clearly state that if the loan is not repaid in accordance with the agreement the company may seek legal action to recover the outstanding debt.
If you are unsure how to document an agreement for a loan/learning agreement and would like some guidance, then please get in touch at firstname.lastname@example.org and we can help ensure that you have a suitable robust agreement in place.
Please note our blog posts contain general information and are intended as guidance only and should not be taken as an authoritative or current interpretation of the law. Please ensure that you obtain advice tailored to your individual situation before taking action. These posts apply to the UK only.