The rising cost of living is causing three out of five employees to take on debt, suggesting rising levels of financial distress among Britain's workforce [1].
This has a knock-on effect for employers, as financially vulnerable employees are more likely to experience things like poor mental health, reduced productivity and higher rates of absence. Employees may also consider job and career changes to help increase their income.
In this article, we will explore how – and when – salary advance loans can be used to help workers struggling to keep up with the rising cost of living.
What is a salary advance?
A salary advance is just what it sounds like – it allows employees to access a portion of their salary before their usual payday. In effect, the business is loaning an employee money, which is recouped from their regular salary.
Some salary advance schemes are short-term. An employee might be advanced £100, which is deducted at source from their next pay packet. In other instances, a salary advance may be more substantial, and might be deducted in instalments from multiple salary payments.
How does a salary advance work?
Fizzbox is a Brighton-based online retailer with around 25 full-time employees. The company provides salary advances to employees through a ‘helping hand’ scheme that is designed to help support workers with specific outgoings. “People can request a salary advance to help with things like a wedding, birthday or Christmas, which is given as a cash advance,” says Stephanie Hague-Evans, the company’s people director.
The loan is then repaid through small, manageable instalments over a suitable time period, which is discussed ahead of time and agreed with the individual. The scheme has seen a slight increase in demand over the last six months, and Hague-Evans says the feedback has been extremely positive. “We’ve had employees reach out to tell us how grateful they are that the scheme exists and just knowing the option is there provides them with some peace of mind,” she says.
What is the difference between a salary advance and a loan?
There are several important differences between a salary advance and a loan.
The most important is that a salary advance typically only gives an employee access to wages they have already earned. The employer is agreeing to pay this amount of wage early and will recoup it from wages paid at a later date. A salary advance is usually interest-free and does not cost the employee anything.
An employer loan might be offered to pay for a season travel ticket or vehicle. It will usually be paid separately from the employee’s wages, and will be repaid in instalments, which might include a discounted rate of interest. This type of loan will be cheaper than a bank loan in most cases but will not be free of cost.
Advantages of a salary advance
Offering a salary advance to employees who are experiencing financial distress isn’t mandatory and won’t be suitable for all businesses. However, there are benefits to both employers and employees that are worth considering:
Employee engagement and retention
At Fizzbox, the helping hand scheme is part of a wider effort to create a culture of safety and mutual trust, says Hague-Evans: “We want people to feel comfortable to talk to us when they’re struggling, and we have a duty as employers to ensure that financial wellbeing is part of the workplace dialogue. Schemes like ours remind people that it’s okay to admit things are challenging and that there’s support available.”
Employees who feel happy, supported and trust their employer are less likely to leave their jobs [2], meaning companies spend less on recruitment, and benefit from happier employees, adds solicitor Alexandra Farmer, head of team at employment law firm Worknest. This can be a compelling advantage in industries with high turnover or staff shortages.
Business owners can also support their employees using the American Express® Business Gold Card. Membership Rewards® points can be used to redeem a number of employee perks and, alternatively, Cardmembers can redeem their points as a statement credit and reinvest in their teams as they wish¹.
Better mental health for employees
A recent report [3] from the Royal Society for Arts, Manufacturers and Commerce found that 47% of young people are unable to make ends meet each month, or have an unstable income.
Having a salary advance option for employees gives young workers greater autonomy and stability. This means they are less likely to suffer the stress and poor mental health associated with debt.
Disadvantages of a salary advance
Risk of problems with repayments
Problems recouping salary advances are rare, but they can happen, says Farmer.
While larger companies can recoup salary advances through their payroll systems, this isn’t always possible for smaller employers and the accounting systems that they use.
Instead, Farmer says that some small businesses turn to third-party specialists to manage salary advances and repayments via direct debit, and this is where problems with repayment can occur.
“Someone who leaves the company while owing an advance could simply cancel the direct debit,” says Farmer. “More likely, if the employee is having financial problems, they might not have available funds to make the repayment. At that point, it might be that the salary advance has caused more problems than it solves."
Risk of increasing debt problems
The second potential issue with a salary advance scheme is that it can lead to long-term problems if employees rely on them too much. “These schemes can come in handy if an employee faces an unexpected and urgent cost such as boiler breakdown, but if they use them regularly, they can become reliant on early cash release,” says Farmer.
While the fees involved in salary advance are very small, they do add to overall debt and can increase financial pressure, she adds. “As fees tend to be repaid at the point of salary being paid, it’s important for employees to recognise that their monthly salary will be lower than normal for that month,” she says.
To address this risk, Fizzbox has set a range of limits, including employees only being able to take out one advance at a time.
“This type of scheme is only effective when it’s caring, thoughtful and logical,” says Hague-Evans. “We’re careful not to agree large amounts that could lead to someone getting further out of their depth, and we jointly agree a repayment plan that feels comfortable to the employee.”
How to do a salary advance
For smaller businesses a salary advance scheme might be agreed between the employee and an HR representative and processed through normal payroll systems. However, as your company grows, the administrative burden of creating agreements around salary advances of varied amounts can become significant.
At this point, you might consider working with your payroll supplier or a specialist salary advance company that will offer employees “earned wage access” along with a range of financial and budgeting tools. These firms will generally charge a fee of between £1 and £2 per transaction and provide an alternative to costly payday loans.
1. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
References:
[1] ICPUK, 2022, Financial Wellbeing Survey
[2] Indeed, 2021, Workplace Well-Being Insights from the 2021 World Happiness Report
[3] RSA, 2021, ‘Generation precariat’ as cost of living crisis hits Gen Z