Practice Areas

Three Things to Consider Before Making Employee Loans

If your company is considering developing (or revising) an employee loan policy, or even just making a one-off loan to a stellar employee, read on. Unbeknownst to many employers, there are a number of laws and regulations that impact almost every facet of the loan – from who can receive one to how your company will be repaid.

1.  Governance Laws Restrict Who You Can Issue Loans To

For example, the Sarbanes-Oxley Act of 2002, which applies to publicly-traded companies or companies preparing for their initial public offering, places restrictions on which employees may receive personal loans. So, too, do some laws affecting non-profit organizations. For this reason, you’ll want to speak to a corporate lawyer with experience in corporate governance and/or a regulatory lawyer with experience in non-profit organizations to review the parameters of any loan policy you may adopt or loan you may make.

2. Employee Loans Have Tax Consequences

Depending on how a loan is structured, a loan can have adverse tax consequences for an employee. For example, interest-free and below-market loans may result in the spread between the reduced or non-existent rate and the market rate of interest being treated as taxable compensation to the employee. You’ll want to speak with an accountant or tax lawyer to navigate this and other tax issues relating to employee loans.

3. Labor Laws Restrict Repayment Methods

The easiest way to collect loan payments is through payroll deductions, but applicable wage-and-hour laws may either restrict your ability to do so, or specify parameters within which those deductions can be made. For example, the New York Labor Law permits employers to make deductions from an employee’s wages for repayment of a wage/salary advance, but only if the employer follows certain rules requiring written authorization and adoption of a dispute resolution procedure as well as rules relating to the timing and duration of the deduction. Furthermore, under the New York Labor Law, if payment of interest or loan fees is contemplated, those monies may not be repaid through a wage deduction, or even by a separate transaction.

These are only three, of many, legal issues to consider before making an employee loan. Once you have the legal implications sorted out, and still want to move forward with an employee loan, your company should consider developing a written employee loan policy to ensure consistent treatment of employees. In addition to the issues above, you’ll want to consider and address the following in any policy: circumstances for making a loan, employee eligibility, total and individual loan maximums, and length of loans.