How employee salary advances work
Occasional emergency loans are OK, but regular pay advances are fraught
If you need a few extra dollars for an unexpected emergency, there's one source you may not have considered: Your future paycheck.
Depending on where you work, you may be able to get an advance on your salary. Since any loan is really borrowing on future money, this method simply cuts out an expensive middleman: the lender. "Organizations having policies on short-term loans is becoming more common," says Martin Yate, executive career strategist and author of "Knock 'Em Dead: Secrets & Strategies for First-Time Job Seekers."
With a salary advance, you repay it either out of your next paycheck or over an agreed time span.
Unlike a popular form of borrowing from your future -- raiding your retirement account -- this one requires your employer's permission. And some companies restrict the circumstances under which they'll green-light an advance.
Depending on the employer, terms can vary widely. Some employers may charge a few bucks to cover the paperwork. Others do it strictly on a handshake for no charge. "The most import thing for people to understand is these are not notional loans, they're real loans," says Richard T. Seymour, a Washington, D.C.-based employment attorney.
Like a bank or card loan, they have to be paid back on a schedule, he says. It's not like borrowing from a friend or a family member and saying "I'll pay you when I can," he adds. Similar to taking a 401(k) loan, this move "weds you to your job," says Seymour. If, for whatever reason, you part ways with your employer, you could be expected to repay the balance in full when you leave, he says.
Before you decide, have a heart-to-heart with yourself, says Marilyn Landis, past president of the National Small Business Association and president/CEO of Pittsburgh-based Basic Business Concepts Inc. Among the points she advises employees to consider: Why do I need this? Can I pay it back? And what, in my financial situation, is the real reason I'm considering this?
If you have a one-time, unforeseen expense and don't want to borrow or resort to a high-interest credit card, that's acceptable, she says. "But if it's a lifestyle issue, and you can't make ends meet -- you don't want to open that door to your boss."
Intrigued by the idea of a salary advance? Before you go all in, find out if it's even an option where you work.
Your first stop for sleuthing: online. Some employers post their pay-advance guidelines on their sites. But if your employer doesn't, then your next step is the human resources department, says Yate. By going to HR, you get to gather information without putting your boss (or yourself) on the spot before deciding if this is something you want.
"Most employers have or should have policies in place describing what their payroll practices are," says Gail Golman Holtzman, a lawyer with Tampa-based Kass Shuler.
How to ask
Ready to ask for an advance?
If it's a small company and "your boss is the ultimate authority, go to your boss," says Yate. "If not, go to HR." If you take the latter route, don't even bring your boss into it, he advises. Whatever your approach, "preparation is key here," says Yate. Make sure your dress and demeanor are businesslike.
Be strategic about your timing, too, he says. Avoid hectic days and your company's "rush hour." If you have the leeway, you probably want to skip Monday mornings and Friday afternoons -- when people are trying to catch up from the weekend or get out the door. Instead, consider Monday or Tuesday afternoons, he says.
State, briefly, "why you want the money, and why the need is urgent," says Yate. In an ideal world, your boss wouldn't care why you need the money, says Larry Nannis, CPA, shareholder with the Needham, Mass.-based CPA firm of Katz Nannis + Solomon. "As the employer, it's probably none of my business," he says. But since bosses may be concerned about enabling employee problems, there "should be a willingness to explain why they need the money," he says. Landis agrees. "If they don't, the boss can't help but think, 'Is there a drinking problem? Is there a gambling problem?'" she says.
Does asking for an advance invite the boss into your personal financial business? "To a degree," says Yate. "But unless you're independently wealthy, there are times in life when money is short" and the need is urgent, he adds.
Face it, just the fact that you're working at all means you need money, he adds. "It shouldn't be something that someone should be nervous asking."
Keep to the short-and-sweet version of the story: 100 percent true, but minus all the gory details. Mr. Corner Office doesn't need to know that your teenage son broke his leg because he stole the family car and crashed it. Or that this is your daughter's third stay in rehab. It's enough say that a family member needs unexpected medical treatment.
You do it a second time -- that's a red flag. It has to be a once-in-a-very-long-time affair.
Executive career strategist and author
Rest assured that "federal laws prevent employers from prying too deeply," says Declan Leonard, managing partner with the D.C.-based law firm of Berenzweig Leonard, who focuses on employment and labor law.
Paperwork is good
Expect a little paperwork, too. While some (especially smaller) businesses may make advances on a handshake, many will ask you to sign something acknowledging the loan, specifying the amount and the date you received it, and spelling out the payback schedule.
Included in your paperwork will likely be a clause giving your employer permission to debit your payments from your future paychecks. That's because absent an employee's express permission, "you don't mess with someone's paycheck," says Leonard. "That's a big no-no."
Repayment agreements have to comply with federal and state employment laws, says Holtzman. So it is important to understand limitations on the right to deduct and any other restrictions that affect your agreement, she says. Unless the entire loan is coming out of the next check, there "should be a written agreement -- so everyone is clear," says Landis.
Another reason to put it in writing: If your boss leaves or if the company is sold, you may need something that protects you. "You never know what might happen," says Landis.
What if you and your job part ways?
That agreement should also cover what happens with the loan if you quit or are fired.
In the event that you're dismissed and have a severance package or back pay, an employer may simply deduct the remainder of the loan balance from that final check, says Nannis.
If that presents a hardship (and if you're on good terms with your employer), you can ask to keep making payments on the same schedule, he says. Debiting your final paycheck for the full amount may not be legal, says Leonard. If you have a repayment schedule, an employer "can't change the rules in the middle."
From the employers' side of the table, the company loses leverage over you when it stops cutting your paycheck, he says. "They become just another creditor." And, "if there isn't enough in the final check, the employee should want to repay that debt," says Nannis.
Have one -- and be done
Worried how you and your money management skills will be perceived at the office if you ask for an advance?
If it's a one-time glitch and you repay it, you'll be fine, says Yate. But if you want to get your loan and maintain a good career, it needs to be a single occurrence, not a habit. "You do it a second time -- that's a red flag," he says. "It has to be a once-in-a-very-long-time affair."
Also vital: Stick to the repayment plan. "Nothing will get you sideways with your employer" faster than asking for an advance, not being able to pay it back and asking for another advance, says Landis.
There's also a "sliding scale" of acceptability when it comes to requesting a salary advance, says Yate. "The higher you go on the corporate ladder, the more you're earning, the less this will be appreciated." And finally, for your career's sake, hush. Whether you get the money or not, don't talk about it -- and save those Twitter and Facebook posts for other topics.
"If you are fortunate enough to get an advance, keep it to yourself," says Yate. "Announcing it on your social media is about as smart as hitting yourself in the head with a hammer."
See related: 7 best-to-worst ways to borrow $500
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