Every year, business owner Jim Fab lends his 25 employees as much as $4,000 interest-free for personal expenses they can't afford up front, ranging from down payments on homes and cars to funeral and legal fees. Most pay him back – eventually.
"I
had a guy send me $300 a month for three years after he quit," says Mr.
Fab, whose electrical-contracting company, Fab Electric Inc., has been in
operation in Gaithersburg, Md., since 1978.
At
small, closely knit companies, business owners like Mr. Fab sometimes take on
an extra role: that of the parent who opens up the wallet when the kids need
cash. After all, they typically can't steer their penny-pinched workers toward
the kind of resources that many big companies have, such as credit unions and
debt-counseling programs. Instead, the only option they usually have is to dig
into their own pockets – and many say they do with little hesitation.
"It's
normal," says Laura J. Wellington, co-owner of Giddy Gander Company LLC, a
Ridgewood, N.J., provider of educational media content for children.
Entrepreneurs often develop close ties with their staff members given they have
so few, she explains, adding that's why she's felt comfortable loaning her 12
employees around $10,000 over the past two years. "I know my employees
exceedingly well," she says, down to their spending habits. "If the
person is credible and there's good reason to give out the loan, then I will do
it."
These
days, more workers may be prone to asking for financial support, as they're
more likely to be the only members of their households earning an income. A
report released earlier this week from the Labor Department shows that the
share of families with an unemployed member rose to 12% last year from 7.8% in
2008 – the highest level since the government agency began collecting such data
in 1994.
There's
no firm statistics on how many small-business owners lend money to staff. But
those who frequently engage in the practice say it makes good business sense.
One reason, they say, is that it can help prevent a slowdown in productivity
because workers who are stressed out about money may have difficulty focusing
on their jobs.
Another
rationale for helping employees overcome financial hardships is that it can
boost loyalty, morale and unity within a work force, says Elie D. Ashery,
co-founder of Gold Lasso Inc., a software company also in Gaithersburg that's
given out loans to its 10 employees of up to $3,000 each. "Sometimes
they're living paycheck to paycheck so we regularly go out of our way to help
our employees keep their family obligations," he says. "It really
helps to create better cohesiveness."
Offering
financial aid to employees also can enhance a company's reputation, adds Shaun
Burwell, chief financial officer of 2HB Software Designs Inc. in Columbia, Md.
The systems-engineering firm has loaned its 17 employees more than $50,000 over
the past five years, he says, and many recipients have shared that fact with
family and friends. "It has been a positive discussion point," he
says.
Certainly,
there are potential downsides to lending workers money, such as the possibility
of never getting paid back. For this reason, some owners say they only give out
amounts they could live with losing for good. Others require workers to provide
some form of collateral, such as the title to a car they own, or arrange to
withdraw payments directly from their paychecks.
But
John A. Snyder, a partner with law firm Jackson Lewis LLP in New York, says
arranging for employees to pay back loans through salary deductions can have
legal consequences. "You have to be careful about violating wage laws,
especially if any deductions could potentially bring the employee below minimum
wage," he says.
Mr.
Snyder also warns that owners could be sued should they opt to give out loans
to some workers but not others. "Whatever policy they have should be
implemented in a uniform and nondiscriminatory way," he says, adding that
it should also be put in writing and signed off on by an attorney.
Employee
loans don't need to reported as income to the Internal Revenue Service since
they're designed to be paid back, unlike monetary gifts, which are considered
compensation, says John McQuaig, founder of McQuaig & Welk PLLC, a
public-accounting firm in Wenatchee, Wash. But for safe measure, he urges
business owners to record every loan they give out to employees on paper,
including details on how it should be paid back and by when, and have them sign
it, he advises.
Meanwhile,
owners should consider the possibly that lending money to employees will create
an awkward work environment, warns Christopher Carey, a small-business adviser
in Brooklyn, N.Y. He says some might find it uncomfortable to inquire about
late payments as well as embarrassing for the recipient, particularly in a
small firm where other staffers might be within earshot. "It can cause
undue stress," he says.
It's
also possible that some workers will make a habit of asking for handouts, adds
Mike Faith, founder of Headsets.com Inc., a retailer in San Francisco with 55
employees. "It could become a norm or expectation," he says.
"It's got to be for a one-off event rather than just giving them money to
feed bad spending habits."
But
the bottom line, says Mr. Fab, the electrical-contracting company owner, is
that there needs to be a high level of trust and respect between everyone
involved to ensure a positive outcome. "It's not a good practice to get
into unless you have a personal relationship with your employees," he
says.
As
long as that's the case, Mr. Fab doesn't see much of a need to worry.
"You're the guy who signs their paycheck," he says. "They're
going to pay you back before anybody else."
Source: Wall Street Journal - June 4, 2010
Source: Wall Street Journal - June 4, 2010
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Kevin Minton
CEO
Chief Executive Boards International
KevinMinton@ChiefExecutiveBoards.com
