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Salary Advance: Good for Employees or Bad for Business?

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Employee Management

Salary Advance: Good for Employees or Bad for Business?

Salary advances can be a great help in keeping employees motivated, but they can also lead to problems. It is important to consider the long term impact of this policy before implementing it.

Workpay
October 27, 2022
6
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October 27, 2022
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At one point, employers are likely to face a request for a salary advance from one or multiple employees. There are different opinions and literature online on whether a salary advance is a good or bad thing for employees and employers. Like every other concept, it has effects on both parties, with advantages and shortcomings.

It is important for business owners and employees to understand the concept of salary advance and what it could mean long term. The information below details this information and related topics.

What Is Salary Advance?

Salary advance is a short-term loan that an employer gives to their employee. The loan is then deducted from future salaries, so it essentially comes from this source.

For example, an employee can apply for a salary advance in January; then, the amount will be deducted fully in the next paycheck or instalments over a few months. Often, the employer and employee have to agree on this.

Employers do not have to give their workers salary advances; it is not an employee’s right. There is no provisional law that requires employers to provide salary advances. In fact, some employers’ policies do not accommodate it.

Those that do often give it under discretion. Additionally, companies have internal policies outlining the conditions and repayment terms. Similarly, these policies can outline eligibility for an advance in the company. Often, the human resources functions are in charge of providing salary advances.

When employers lend advances, they must accommodate it for all employees. Managers cannot discriminate based on race, religion, and disability. 

Why do employees take salary advances?

Monthly pay is one of the reasons why employees may need salary advances. This type of payment system can strain employees, especially in case of late payments. Budgeting for costs can be more challenging to manage with a monthly salary, especially for people who have just started working.

Besides this, most people take advances to cover surprise bills like medical emergencies and unexpected financial setbacks. Often when companies provide salary advances, it will be because of these and other ‘practical’ reasons. 

How Does A Salary Advance Work?

Companies that offer salary advances have restrictions in place. In fact, a salary advance policy is important for legal issues and to ensure the employee is treated fairly. Companies can also have eligibility requirements such as a record free from disciplinary actions, full-time employment, minimum tenure of employment, and no prior requests for a pay advance.

The maximum amount an employer can advance to an employee often depends on company policies. Employers can set a minimum and maximum borrowing amount for employees.

For example, the employer can set up a limited percentage a worker can take based on the employee’s salary— employers can limit it to not more than 50 to 80%.

Some employers charge an interest fee to cover the process’s cost, but others do not. However, there are tax issues to work out, as in payroll. Employers can account for it as they would payroll or with the help of payroll software.

Employees who require salary advances should understand the company’s policy and ask for guidance before applying. HR should provide answers to questions like:

●  What is the amount after tax reductions?

●  How will the employer distribute the funds?

●  What is the timeline/deadline for repayment?

●  What happens in case of quitting or termination from the job?

●  What will future paychecks look like after the advance?

Advantages of salary advances

Salary advances offer benefits to employees as they can meet the financial demands of emergencies and setbacks. But surprisingly, companies also have something to gain by providing salary advance options.

1. Better productivity

Managers that offer salary advances have a better chance of boosting productivity and focus in the workplace. When an employee is busy worrying about paying for a medical emergency, or personal loan, their productivity significantly drops.

It could mean missed opportunities, affecting the company’s bottom line. An advance payment can put employees’ minds at ease, allowing them to focus during business days, thus improving total outcomes.

2. Promotes employee loyalty

Offering the salary advance option can make employees more loyal to a company. Loaned money is a show of trust, and employees value their companies more since they can rely on them in their time of need.

3. Better employee recruitment and retention rates

Offering employees some form of financial assistance during their time of need is a good way for managers to retain current workers and attract top talent during recruitment. Employees are likely to stay in a company that supports financial assistance programs. Similarly, new talent is easily drawn to such strategies.

4. Improves the brand image

Offering advances also reflects on a company’s culture. It informs others that a company cares about employees’ welfare which contributes to the company’s social standing and image.

Cons of salary advances

Often, a salary advance poses some disadvantages, especially to employees. Employees may have to pay interest on top of what they borrowed. These interest rates can be higher than anticipated considering there are no provisional regulations dictating rates.

If the repayment plan stretches across multiple months, it could leave the employee in a string of debt. It also means that the employee cannot leave their position even if they want to until they clear the debt.

In addition, a salary advance can strain the employee-employer relationship. It can, unfortunately, come with prejudice, especially if it happens often. 

Alternatives To Salary Advances

1. Earned Wage Access (EWA)

Because of the potential negative effects of salary advances, more companies seek alternatives that financially empower their employees. One is the Earned Wage Access or EWA.

EWA is a process where employees can access the wages they have already earned before payday. Unlike an advance, it is not a loan but rather a way for employees to access their pay sooner than scheduled to deal with emergencies and setbacks.

EWA also differs from advances in that there is no interest which could explain why it is becoming more popular among companies.

Companies that use EWA often allow their employees to access a certain percentage of their salary before payday. So, employees still have scheduled payslips.

Research shows that employees are more attracted to companies that offer EWA. Therefore, businesses have a better chance of attracting more talent plus retaining them.

Companies that use this alternative often turn to payroll software that offers access to the function. EWA apps are more convenient, fast, and accurate.

2. Flexible Payroll

Flexible payroll is the other alternative to salary advances. It is a system that allows workers to get paid faster and more often, acting as an alternative to monthly payments. Workers get paid anytime they need it.

Similarly, weekly and daily payments are especially popular among independent contractors and freelancers. But it is important to note that flexible payroll can get out of hand without a proper management system.

3. Financial Empowerment

Helping employees conquer and reduce their financial stresses is another alternative to salary advances in the long run. Some managers provide financial counseling through workshops that offer guidance for home buying, saving, investing, car buying, and other relevant issues.

Another way employers are offering financial empowerment is by giving student loan assistance such as counseling and loan relief. Others are assisting employees in setting up a savings plan for college.

Some employers also offer a retirement plan, which includes literature and a savings strategy. The retirement plan is among the top valued employee benefits that help to empower employees financially in the long run. 

Final Thoughts

Earned Wage Access (EWA) by Workpay can assist employers to empower their employees by streamlining these processes and requirements for a salary advance. Get in touch today to discover how to supercharge your employees’ productivity with financial empowerment programs and training.

Workpay
Workpay Africa

Workpay is a HR and Payroll software company that offers time & attendance, payroll, human resource, leave, expenses and remote teams solutions to businesses across Africa.

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