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Introduction to this document

Loans policy

If you’re willing to provide occasional loans to employees on a discretionary basis, consider including our loans policy in your staff handbook. It sets out the procedure for applying, how the loan will be paid to the employee (if granted) and how repayments are to be made, as well as what happens on termination of employment.

Reasonable discretion

Our Loans Policy can be inserted into your staff handbook where you provide employee loans as a discretionary benefit. You need to exercise your discretion fairly and reasonably and in a non-discriminatory way so you might want to consider why the loan has been requested and what the amount is (comparative to the employee’s annual salary). Remember that you’re under no legal obligation to assist an employee who’s in financial difficulties so it’s entirely your choice whether to do so, provided always that you adopt a consistent approach to any applications you receive.

Policy wording

Our policy sets out the procedure for applying for a discretionary interest-free loan, how it will be paid to the employee if granted and how repayments are to be made, i.e. by way of deduction directly from the employee’s salary over a twelve-month period. You can make this period longer or shorter depending on the circumstances to make both the amount and the repayments manageable. This may mean that you agree to grant the employee a loan but for a smaller amount than they originally requested. For example, you might have a broad rule of thumb that you will not loan more than 10% of the employee’s annual salary and that no more than one loan will be allowed to run at any one time.

Agreement for loan repayment

It will also be necessary for you to draw up a proper written agreement with your employee to ensure that regular weekly/monthly deductions from their wages to recover the loan are made lawfully. Section 13 of the Employment Rights Act 1996 makes it unlawful for you to deduct money from an employee’s wages unless the employee has either given their prior written consent, there is a relevant provision in their contract of employment or it’s required or permitted by legislation. You can use our Agreement for Loan Repayment for this purpose. It’s recommended that your agreement also makes it clear that if the employee leaves employment before the loan has been fully paid back, you can recover the outstanding balance by way of deduction from their final pay and expenses. If final pay isn’t enough to cover the outstanding balance, you also need provision for them to repay this to you within a set period of the termination of their employment. This issue is covered in both our policy and agreement.