Sometimes when employees need financial help, they approach their employer to get a salary advance as a form of loan to take care of their requirements. The employee can ask advance on salary, and there must be a policy to define the employee’s eligibility for such advance payment of salary before the payroll.
Thus organizations formulate a salary advance policy to standardise and streamline various processes involved in the salary advance.
Having a salary advance policy is important as it guides the employee as well as the company’s management to stay compliant with all the requirements of the salary advance before payroll is processed on the usual payroll day.
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Difference between Advance Salary and Employee Loan
The payment of advance salary should not be confused with the loan to the employee. When an employee wants to get an advance on their salary, as an employer, you pay a certain about of their upcoming salary in advance.
The salary advance can be recovered from employees in single or multiple deductions from their future salaries. The terms and conditions of the payment as well as deductions or repayment of the advance salary, depend on company policies.
An employee loan, on the other hand, is given for various purchases, such as houses and vehicles. The loan that employees get from the company often has a similar interest rate as the market.
How to Write a Policy for Salary Advances?
There must be a salary advance policy in your company. That helps to keep the advance or the salary for the employee’s uniform throughout the organization. There are a few essential aspects to be included in the policy so you can draft an effective salary advance policy as described below.
The scope of the policy should define to whom the policy is applicable. The scope also defines the eligibility of the employees for the payroll advance.
For example- The scope of the policy will explain the period that an employee has to complete with the company to be eligible for the type of employment such as full-time, part-time or intern.
The section in the policy should define the conditions for eligible employees to be able to get the advance salary before the payroll date. The conditions should apply to everyone irrespective of their position and should protect employees from any type of discrimination.
To get the advance pay employee must have a valid reason. An advance salary is considered an emergency loan, and the reasons should justify the application. The advance salary is not granted for trivial purposes that can wait, such as luxuries or vacations. For example, a Medical or family emergency requiring sudden bills payment.
Payroll Advance and Repayment
The advance salary is often paid as 50% of the employees’ net salary. Sometimes companies can make exceptions where the advance payment can be extended to up to 80%. The conditions in which such consideration is allowed must be mentioned in the policy.
The policy should also mention a procedure for the deductions for the salary advances given to the employee. If you want to make employees choose from multiple repayment procedures, such as one-time deductions or instalment deductions from their subsequent paychecks, you should mention that.
All the terms and conditions need to be presented in a written contract and signed by the employee. That ensures that employees and employers are well aware of the terms and conditions and abide by them in future.
You can also mention the terms that are applicable to the employee in case they resign before repaying their advance salary pay.
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When your employees want to ask you to pay their salary in advance, they should know the standard procedure to be followed. The procedure to ask for an advance salary often starts with filling out the request form.
This form can be submitted to employees to their manager directly to the HR department. If there is a chain of command which involves their manager, HR and the accounts department, you need to explain it in your advance salary policy.
As an employer, you should also have a provision to inform the employee within a few hours if their request gets rejected. This ensures necessary communication, and employee can go for their other options to arrange the money as there can be time constraints.
It’s important to understand the difference between advance salary and employee loan. Advance salary payment is an emergency measure, and employees should be aware of that. The advance salary payment policy should be drafted carefully to provide employees with all the essential information.