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14 Apr 2014

Salary Advances Can Trap Employees in Vicious Cycle of Debt

Early this month, I had a chat with a group of human resource managers from various local firms who complained about what they termed employees’ increasing abuse of the salary advance system.  

From their observations, I realised that many workers bear heavy debt burdens arising from abuse or over-reliance on this facility.

I have also observed that employees with good financial health sometimes rush into impulse borrowing without a repayment plan.

Every time a salary advance is deducted from the employee’s pay cheque at the end of
the month, he is left with no option but to take another advance to see him through the month.

This is why it is imperative for employers to discourage salary advances in order to reduce their employees’ eventual pain.  

But it is also important to recognise that workers may sometimes have pressing personal needs to meet. 

Apart from such extraordinary circumstances, firms should formulate or review salary advance guidelines to discourage abuse of this facility.  Although this scheme is directly beneficial to workers, it also holds lots of benefits for the employers.  

But the disadvantages outweigh the gains. An employee with unmet living expenses such as rent, electricity bills and other recurrent expenses would be forced to borrow soft loans from colleagues or friends to pay up.

When the whole salary goes into repaying debt, an employee would lose the motivation that comes from his remuneration and divert his attention to other means of earning extra income.  

Research has shown that poor financial wellness such as debt are correlated with excessive absenteeism, frequent sick offs and lateness as the affected employees tries to create time to earn money on the side.  

This explains why a salary advance should be kept in most workplaces but with clear guidelines to avoid abuse.

Some of the provisions to consider in the guidelines may include: 

Eligibility: 
Salary advance is simply money paid in advance for a limited number of months for which the employee shall work in future. In contrast to convectional loans, these are issued with no interest charged on the borrower.  

Due to limited resources and budget, salary advances cannot be granted to all employees but only to eligible employees. To be eligible, one must have worked with the company for a numbers of years.

Extending salary advances to staff on contract or on temporary employment terms may pose a challenge of delinquency as the employees may abscond with the money.

Use: 
An eligible employee may ask for an advance only in emergencies and subject to the set requirements, limitations and approval requirements. This means that only genuine cases can be considered.

Unless the cause of the request was unpredictable or unforeseen and can be supported with some reliable proofs, it should be rejected.

Frequency: 
Owing to the limited budget for salary advance, the frequency or the number of times one can borrow should also be controlled. 

Depending on the size of the budget and the number of employees, this can be limited to either once a year or twice a year at most with the latter for extreme cases. 

The employee may not request or receive more than one salary advance within a 12 month period. This implies that an employee may not request or receive salary advances in consecutive pay periods, even if they cross a calendar year.  

Amount: 
This is usually a tricky matter because too low a figure may mean that the advance may not be helpful to the employee and may force him to seek other sources of borrowing.  

Conversely, setting a higher amount may also pose a challenge in terms of repayment.

Adapted from Business Daily Africa

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