How To Draft an Employment Loan Agreement

Standardized Legal Documents How To Draft an Employment Loan Agreement

Learn the Ropes—Writing an Employment Loan Agreement

While the employer typically drafts an employment loan agreement, it should be a joint effort as both the employer and the employee will need to sign this legal document and agree to its terms.

Regardless of your position, we will help you understand the intricacies of an employment loan agreement and how it’s different from a regular loan agreement. This article will also assist you in weighing the pros and cons of entering into an employee loan agreement.

What Is an Employee’s Loan Agreement?

An employee’s loan agreement is a document between an employer and an employee stipulating the terms of a loan from the employer (lender) to the employee (borrower). When an employee is in debt, struggling to pay bills, or buying a house, they may ask their employer for a loan. Both parties will agree on the amount of money and payment terms, but the employer gets the final say as they are the lender.

How Is an Employee Loan Agreement Different From a Loan Agreement?

The essential terms of an employee loan agreement are the same as in the loan agreement—for example, stating the amount that is lent, a promise to repay the debt, etc.

Employers and employees who intend to enter into an employment loan agreement need to abide by certain state laws. In some states, such as Alabama and Florida, employers can deduct the employee’s salary as a debt payment. If this is the case, the deduction shouldn’t reduce the wage below the federal minimum. Typically, an employee will need to sign an authorization for this type of repayment.

What To Consider Before Drafting an Employment Loan Agreement

Before granting/accepting an employment loan and signing the contract, you should contemplate the pros and cons of doing so:

  • Alleviating financial strain for an employee
  • Building loyalty in the company
  • Increasing productivity by solving a major problem
  • Risking the company’s funds
  • Creating workplace friction if any issues arise
  • Creating pressure for the employer to keep lending money

If you are the employer, you may decide to establish a lending policy before entering into an employment loan agreement to protect yourself and the company. You can consider determining the following:

  1. Minimum time period someone needs to be in employment to ask for a loan
  2. Limit on the number of times you can grant a loan
  3. Limit on the amount of money that you can lend compared to the employee’s salary
  4. Time frame for repaying the loan
  5. Remedies in case the employee borrowing the money leaves the company

What Should an Employee Loan Agreement Cover?

While you should customize an employee loan agreement to fit the terms both parties agree on, there are certain clauses you need to include in almost every agreement, such as:

  1. Lender and borrower—full names and addresses of both parties
  2. Dates—the date of signing, the date when you carry out the loan, and any dates or time frames for repayments
  3. Loan—details of the loan, such as the amount and interest rates, if any
  4. Payment schedule and methods—e.g., monthly payments or a lump sum
  5. Promissory note—a promise in writing that the employee will repay the employer
  6. Default and late fees—e.g., automatic deduction from the salary or legal action in case the employee quits or refuses to pay
  7. Signatures—check your state laws for signature regulations (e.g., if one or both parties should sign the agreement and whether any witnesses need to be present and sign too)

Let DoNotPay Generate Different Legal Documents for You

Whether you’re an employer or an employee, you’re bound to write contracts aside from the employment loan agreement. They could also be connected to business or real estate and personal matters. Rather than hire a lawyer or download a contract template, you can use our app to create many legal documents, including:

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Follow these instructions to get a legal document of your choice:

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Learn About Other Agreements and Legal Documents With DoNotPay

If you need guidance on creating certain legal documents, you can turn to us for help. Check our learning center for tips and hacks that will assist you in drafting your document. These and many more guides are at your disposal:

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