How to Deal With Excessive Employee Pay Advances

Filed under: Small Business, Small Business Advice, Planning

The relationship between employee and employer within a small business is an idea that should work smoothly in theory. A conscientious employer who is respectful and pays competitive wages should have no problems getting along with their capable and hardworking employees. In theory.

But in the real world, a number of issues can get in the way of a smooth working relationship, and one of those issues is when employees request an advance on their paycheck.

There are times when even the most fiscally responsible employee may need some extra cash. Not only is it bad business, but morally questionable for an employer to deny an employee an advance when they have a crisis come up that is not of their own making.

Advances only become a problem when they are requested on a regular basis because they constrict cash flow and necessitate extra processing and paperwork -- all things that can have an impact on running a small business.

Advances have a tendency to go viral as well, meaning that once you agree to an advance for a certain employee, others will find out, and you will soon be inundated with requests. This may cause tensions between owners and employees, which can lead to a very unpleasant work environment.

To solve the problem of persistent advances, it is important to examine what may be the biggest contributing factor, frequency and timing of pay. When I ran my own small business I paid my employees every other week, on a Friday. Now think for a moment about what that means.

You've put a half month's wages in your employee's pocket at the end of working five days straight, and before having two days off. There is a natural temptation for most people at this point to blow off some steam, and even the most responsible employee can lose a good chuck of their pay drinking at a local watering hole, betting on some weekend games or buying a TV that's at a big-box retailer.

One solution to this problem is to change your pay period from twice a month to weekly. Employees can't spend what they don't have, so by giving them less money -- but more often -- you make it harder for them to get in the hole financially and necessitating an advance.

If you don't want the hassle of a weekly payroll, why not try changing your company's payday to Monday instead of Friday?

An employee is less likely, and has fewer opportunities, to blow a big chunk of their pay when they get paid on a Monday, as most sporting events and sales are only on the weekends. And the responsibility of being at work on time and ready to go -- for the rest of the week -- cuts down on the post-paycheck watering hole activities.

I have known small business owners who paid their employees daily to eliminate advances, and even one who -- with written consent -- allowed his employee's spouse to come to the office to pick up his paycheck.

Of course the ultimate solution to this problem is for a small business owner to state up front when hiring a new employee that there is a "no advance" policy, and to stick to that policy for all employees, (with the exception of emergencies).

In the end, it all comes down to how much of an issue pay advances become, and how willing, flexible, and creative a small business owner is prepared to be in order to solve the problem.

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."

 

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