Employee Loan Agreement

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Employee Loan Agreement

A Brief Introduction About the Employee Loan Agreement

An employer-employee relationship in today’s time is not limited to old norms. To increase the productivity of employees or to give financial stability to them, employers are trying out many things. A loan is one such thing. When an employer decides to give an employee a loan. Further, they both get into a loan agreement known as Employee Loan Agreement. Just like any other regular loan agreement, this one also has one borrower and one lender.

An Employee Loan Agreement is signed as proof of the loan. It must contain the details of the loan and details of how it will be paid. Employees return the loan via their salaries, which means the loan gets deducted from the salary of an employee. By signing the agreement, both parties make it legally binding and agree to the terms and conditions of it.

Depending on in which state the company is, interest rates can be decided by the employer. An employer can also choose not to apply interest rates if the state laws allow. Both parties must make this detail clear between each other. Full disclosure or honest discussion between both parties is mandatory before drafting the agreement.

The agreement will also create a reputation for the company for having a genuine concern for the employees; however, they also have to calculate the risks. For employers, Employee Loan Agreements are a well-thought move. Those who make up their mind about it help some employees who are in dire need.

Who Takes the Employee Loan Agreement?: People Involved

As the name suggests, an Employee Loan Agreement is signed between an employer and an employee. It is like any other loan agreement with a borrower and a lender, but here, both parties are members of an organization. Both parties can also take the help of an attorney or any other financial expert to outline the agreement. However, it will only be signed by the employer and employee. They will only comply with the text of it.

Any employee who is in need of money must check the organization’s policies and see if there is a provision of the Employee Loan Agreement. More and more companies today gravitated towards it nowadays.

Purpose of the  Employee Loan Agreement: Why Do You Need It?

The Employee Loan Agreement is used to specify the terms and details of a loan. In the absence of a loan, there is no need for such an agreement. Some people still have a belief that the small business can’t give loans; however, in today’s context, this is a false assumption. Big or small, all businesses or companies can think of providing loans to the employees. It is just a matter of understanding and planning. There are plenty of reasons why employers want to give the loan, such as eradicating financial crisis that make employees less productive and stresses.

Here are some of the reasons why it is one of the most important pieces of document between an employer and employee –

  • To provide financial stability to employees
  • To reduce the burden of employees and to enhance their efficiency and productivity
  • Gives a business a reputation of being caring for the employees
  • Can be a good investment plan for businesses
  • Installment deduction from salary makes it less risky for the employer

Contents of the  Employee Loan Agreement: Inclusions

An Employee Loan Agreement must include names, addresses, and phone numbers of the company and the employee. Since the agreement is an acknowledgment of a loan, it must include the details of the loan amount. It should further add the applicable interest rate.

It is highly suggested that the employer pay attention to interest rates and applicable taxes. Like any other loan, Employee Loan also needs to comply with tax requirements. The company should also analyze the structure and anticipate any risk and tax requirements. Employees may not always be part of the backend process of the company, but employers can share those details for transparency, especially if tax is applicable to their installments. The agreement must include these important points.

Once all these details are specified, the next important detail is how the loan will be paid back. In most cases, the loan is paid by allowing a deduction from the salary. The agreement should also talk about the ways in which the loan will be paid back if the employee leaves the job or his employment is terminated. It should also add provisions for late installments or delays. If there are additional charges applicable, then that should also be part of the agreement.

The agreement must have other important provisions and clauses such as governing laws, confidentiality, dispute resolution, etc. Since the employees are taking financial help from a place other than the bank, Promissory Note will also be signed by the employees and employer.

Lastly, it is important to note that the employee can sometimes take or use the loan for any reason without specifying it in the agreement or without informing the employer. However, to maintain transparency from both sides, it is highly suggested that the employee reveal the purpose of this loan or where it will be used, in the agreement or orally.

[Also Read: Confidentiality Agreement]

How to Draft the  Employee Loan Agreement?

The Employee Loan Agreement format is quite easy and understandable. But since it is one of the very crucial pieces of document for both parties, they should have a genuine in-person discussion before signing the agreement. They should also discuss key issues such as tax applicable, the interest rate applicable, late installment, delay charges, deadlines, etc.

Sometimes a company gives only a few employees a loan. In such a case, the employer may also ask the employee to keep it confidential. It becomes the employer’s job to structure the process in a way that the atmosphere of office remains positive, and employees remain motivated.

Here are a few more things to take care of before signing the agreement –

  • While employers should take care of their employees’ financial problems, they should also count the risk of providing a loan to them.
  • Both parties can also take the help of an expert, such as an attorney or financial expert.
  • After considering all such factors, the agreement must be drafted in a simple and comprehensible language to avoid any confusion.
  • What happens in case the employee is unable to pay the loan or he breaches the agreement are a few crucial questions that the agreement must answer.

Negotiation Strategy

There is always a risk involved in making professional relationships a little personal or friendly. Thus, while negotiations are part of almost every agreement, in the case of a loan agreement, the lender should try to avoid accepting them. A borrower can always try to negotiate on the interest rate or time period in which the loan should be paid back. If considerations can be made without involving risk, then it is the right kind of negotiation.

Benefits and Drawbacks of the Employee Loan Agreement

Here are a few pros of an Employee Loan Agreement –

  • It makes the employees financially comfortable and stable.
  • Reduces the pressure from the employees and, in turn, makes them more efficient and focused.
  • Compels employees to be more loyal and reliable towards their employers.
  • Builds an employer’s image as a friendly and supportive employer.
  • Works as an investment strategy for the organization.

Here are a few drawbacks of an Employee Loan Agreement –

  • Involves risk.
  • May increase pressure for both parties.
  • It can cause stress in the financial structure of the company.
  • The employee may leave the company and create a problem.
  • May create legal ramifications in the case of violation.
  • Employees who are not eligible for a loan can create a negative atmosphere in the organization.

What Happens in Case of Violation?

While drafting the agreement, both the parties should first orally agree to the dispute resolution method or provision. This reduces unnecessary arguments or fights. In a professional space, arguments only impact the work culture.

Yet, if there are any violations by either of the party, the other one can take the help of state courts. The Employee Loan Agreement is a legally binding agreement(1).

Can the employer provide loans to all the employees, or should there be any metric? Will the left out employees feel favoritism? Does giving the loan to employees increase tax problems for the organization? These are a few things that the organization must figure out and get assurance on, before planning to sign an Employee Loan Agreement. There are immense benefits to the agreement when it’s drafted with precision.