How to manage pay advances for your employees

Sometimes, one of your employees may run into a large unforeseen cost and require extra cash to cover the expenses. In such cases, they may request a pay advance.

Although there are benefits to providing pay advances for both you and your employees, they can add an extra layer of complexity to your payroll system. As a result, it’s important to know how they work.

In this article, we’ll explain how to easily manage pay advances for your employees and streamline them into your wider payroll process. So let’s jump straight in.

What is a pay advance?

A pay advance — also known as a payroll or salary advance — is a type of financial agreement between an employer and an employee. 

Under this agreement, you essentially provide a short-term loan to the employee. The employee then uses these funds to cover the unexpected expenses they’re facing. Afterward, the employee pays off the loan by subsidizing either all or a portion of their subsequent pay runs. 

When an employee requests a pay advance, they must usually state their requested loan amount in writing. You can then either accept or refuse the request, or ask for more information. 

Once both parties agree on the loan amount (including the terms and conditions), the payroll advance agreement is set in stone. 

The primary goal of a pay advance is to protect the employee from financial insecurity and distress. It can also help stop your employees from pursuing risky short-term finance options, such as personal loans and credit cards. 

How do you process a pay advance?

How you process the advance is up to you. But in most cases, it looks something like this:

1. Create a pay advance policy

The first on an employee’s mind might be, “Can I ask for an advance on my paycheck?” 

Therefore, the first step is (if you haven’t already) to establish a pay advance policy. This policy should outline the best practices for employees and employers to follow when managing pay advances. 

Clearly explain what an advance on a paycheck is and how to ask for one. Clarify that the request should be in writing and include the following details:

• The proposed pay advance amount

• The preferred payment method

• The loan repayment method — incremental or a lump sum

The pay advance policy should also outline your responsibilities as the employer, particularly when it comes to responding to a pay advance request. 

For example, the policy may set out a maximum allowed time that you have to respond to a pay advance request. It may also require the finance team to provide proof of the pay advance, such as a digital invoice or receipt.

2. Use payroll software to process the pay advance

Again, if you haven’t already, use a modern HR software platform to streamline your payroll management. 

With Remote Payroll, for instance, your finance team can easily account for pay advances. Based on the conditions of the pay advance, they can subsidize future pay runs on a gradual or lump sum basis, until the employee fully repays the loan. 

Employees can also use Remote’s self-service portal to review their subsidized payslips and keep track of the repayment process.

3. Supply proof of the pay advance

Issue invoices and receipts related to each pay advance request. The evidence should include the loan amount, date of payment, payment method, and terms of the employee loan repayment. Your employee can then use the self-service portal mentioned above to review and accept the invoice or receipt.

Are payroll advances taxable?

Advances are considered taxable wages. However, you won’t take out deductions from the advance itself. Instead, deduct the required taxes from the full amount of the employee’s future paychecks. 

Note, however, that you’ll need to spread out the repayment over multiple paychecks if the subtracted amount could lower the employee’s future pay below minimum wage. In such cases, you might have to issue several adjusted paychecks. 

What are the pros and cons of offering pay advances to employees?

As mentioned, there are multiple benefits to offering pay advances, although there are risks too.

Pros of pay advances

They help maintain financial security

Regularly scheduled pay runs guarantee a baseline level of financial security for your employees. However, employees may need an extra influx of cash in unexpected scenarios, such as medical emergencies or car problems. 

By offering them this type of cash advance on top of their scheduled pay runs, employees can quickly (and easily) secure the funds they need to overcome the financial challenges they might be facing.

They help employees avoid risky short-term financing options

Many companies offer short-term financing via payday loans. Unfortunately, these loans often come with exorbitant fees and high-interest rates.

Offering advances means your employees can access the cash they need without having to take on fees they might not be able to afford. 

They don’t disrupt other payroll functions

Modern HR software like Remote makes it easy to process and manage pay advances without disrupting other payroll functions. Remote even allows your finance team to manage pay advances in your employees’ local currencies.

Cons of pay advances

They can be abused by bad actors

In rare cases, employees may abuse the pay advance system for their own financial gain. For example, they might request a salary advance and then leave your company.

Additionally, employees may lie about the reason behind the frequency of their pay advance requests, which can impact the level of trust between you both.

They can be exposed

If your pay advance policy is poorly written or does not consider the unique nature of your company, then you may have no legal recourse to recover unpaid loans. 

A poorly written pay advance policy could also confuse your employees and your finance team, resulting in disputes.

Employees may struggle to repay what they owe

Employees who are in debt to the company might struggle to make their repayments. Even sympathetic employers may not know what to do in this situation.

A well-written pay advance policy should have standards in place that prevent employers from mistreating employees who are in debt to the company. The policy should also account for non-payers to ensure the company can recover unpaid loans in a legal and compliant manner.

Easily manage pay advances with Remote

As mentioned, Remote Payroll makes it quick and easy to manage pay advances — no matter where your employees are based.

Our automated system also ensures that the repayment amounts don’t accidentally contradict local employment and tax withholding laws, allowing you to help out your employees in full compliance. The platform also allows you to:

• Manage all payroll functions for each employee, including leave and expenses

• Pay employees in local currencies

• Monitor and manage all your payroll costs, including salaries, expenses, benefits, incentives, and more

To learn more about how we can help, speak to one of our friendly experts today!

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