Helping employees in financial difficulties: frequently asked questions

Sue Nickson of Hammonds LLP continues a series of articles on helping employees in financial difficulties with some frequently asked questions, including questions on employers' obligations to help employees in financial difficulties, and what should be included in a loan agreement.

Are employers under a legal obligation to assist employees who are experiencing financial difficulties?

No. However, although employers are under no legal obligation to assist employees in financial difficulties, in some circumstances they may choose to do so. For example, an employer may wish to help a long-serving and valued employee who is having financial problems, particularly where his or her normally good performance has deteriorated because of those pressures. It is often in an employer's commercial interest to help employees who are experiencing financial hardship as these employees are more likely to suffer from stress and, as a result, be absent more frequently, less productive and more prone to making mistakes - all of which can represent a real cost to the business.

Is it appropriate to discipline an employee whose performance has deteriorated due to his or her financial difficulties?

Whether or not it is appropriate to discipline an employee in these circumstances depends on the case. There is no hard and fast rule as to whether it is more appropriate to offer assistance to the employee, take him or her through the performance or disciplinary process, or do both. There are a number of factors that employers should take into account in deciding which approach to take, including the employee's length of service and prior disciplinary record, the nature and seriousness of the decline in performance and the likelihood that the performance concerns will be resolved by taking alternative measures. Employers should also consider the impact of disciplinary action, in these circumstances, on the employee's colleagues. If they discipline an employee with a previously unblemished disciplinary record, for behaviour that is clearly out of character and that can be attributed to personal difficulties, this is unlikely to help workplace morale.

Should employers offer counselling to employees in financial difficulties?

There is no specific legal duty to offer counselling to employees, although, in the wider context of the duty of care, employers that do so are more likely to be able to defend claims of breach of that duty. Many employers do offer employees a confidential counselling service to help them cope with personal difficulties. This may extend to financial difficulties and the problems that can flow from them, such as stress and the strain put on relationships (with colleagues and at home). Employers that offer counselling, whether or not it includes debt counselling, should regularly remind employees of its provision, via emails to all staff, the intranet or noticeboards. Where an employee has indicated that he or she is under pressure due to financial or other personal reasons, the employer should actively refer the employee for counselling.

If their existing counselling service does not include debt counselling, employers could consider engaging the services of an external debt counsellor to assist employees in financial difficulties. Again there is no legal obligation on employers to offer such a service. When introducing a debt counselling service, employers should make clear that it is being provided by a third party and that they are not responsible for the content or quality of the advice provided. It is important that employers do not purport to offer financial advice to employees unless they are competent, authorised and insured to do so.

If an employer offers a loan to an employee, what information should the loan agreement include?

As a minimum, loan agreements should include the following information:

• The amount of the loan.
• The interest rate being charged. Where interest is at a preferential rate, the agreement should make clear that the loan is likely to be viewed as a taxable benefit by HM Revenue and Customs and that the employee will be responsible for the payment of tax due.
• The amount and frequency (eg weekly or monthly) of the loan repayments.
• How the loan will be repaid. The safest method is usually by way of deductions from salary (rather than relying on the employee to pay back the loan). The employer must ensure that it has a clear authority to make deductions. Deductions must be permitted by a relevant provision in the employee's contract or he or she must have given prior written consent to the making of the deductions. Without this the employer risks a claim for unauthorised deductions from wages. Employers are advised to ensure that they obtain written permission to make deductions, prior to making the loan to the employee.
• A provision that, in the event that the employee leaves before fully repaying the loan, the employer will deduct any sums outstanding (including interest) from any monies due to the employee, for example notice pay, accrued salary and outstanding expenses or bonus payments. Although most employers include a broad provision of this type in their contracts of employment (ie that outstanding monies due to the employer will be deducted from final payments), this should also be included in employee loan agreements.
• A provision that, in the event that there is a loan amount outstanding after the deductions from final payments have been made, the employee agrees to repay the outstanding sum on his or her leaving date, failing which any unpaid balance will attract interest (the rate of which should be specified).

Employers may also state that they will seek to recover any outstanding loan repayments through the courts. Employers should ensure that employees sign the agreement before they make the payment.

The amount of a loan will be at an employer's discretion. However, employers will want to ensure that employees are able to meet loan repayments. Employers may decide to set a limit on the amount that can be borrowed by specifying a fixed amount or maximum percentage of net pay. If an employer also offers other types of loan (for example season ticket loans), it may consider setting an overall limit or percentage covering all loans outstanding.

The process for applying for an employee loan should be clearly documented in the employer's policies and procedures.

If an employer offers an employee a salary advance, how should this be documented?

A salary advance is essentially a short-term loan by an employer, repayable from the employee's next salary payment. Salary advances should be documented in a similar manner to other employee loans. The documentation should make clear that the amount advanced will be deducted in full from the next salary payment and, if the employee leaves before payment is due, the employer will deduct the amount advanced from any monies due to him or her (for example notice, salary and outstanding expenses). It should also be made clear that the employer will seek to recover any outstanding amount through the courts, if it is not repaid. Although most employers include a broad provision in their contracts of employment for the recovery of outstanding amounts, this should be included in documentation relating to the salary advance.

To ensure that offering a salary advance helps, rather than compounds, an employee's financial difficulties, the employer should consider setting limits on the amounts or percentages of net salary that can be advanced.

The procedure for applying for a salary advance should be clearly documented in the employer's policies and procedures.

Next week's article will be more frequently asked questions on helping employees with financial difficulties and will be published on 30 March.

Sue Nickson is Chief Operating Officer, Partner (Employment) and International Head of Human Capital at Hammonds LLP (sue.nickson@hammonds.com).

Further information on Hammonds LLP can be accessed at www.hammonds.com.