How can an employer ensure that an employee will repay a loan if he or she leaves the organisation before the loan is cleared?
Section 13 of the Employment Rights Act 1996 makes it unlawful for an employer to make deductions from an employee's wages unless the employee has given prior written consent, or a relevant provision exists to this effect in the employment contract.
Therefore, to ensure that a loan will be repaid if the employment is terminated for any reason, the employer should include a clause in contracts of employment stating that it has the right to make deductions from the employee's salary for various purposes including the repayment of an outstanding loan.
When the employer agrees to make a loan, the details of the arrangement will normally be set out in a separate written loan agreement. This should state specifically that any amount outstanding from the loan can be deducted from the employee's final pay, and pay for this purpose should be further defined for the avoidance of doubt to include (but not necessarily be limited to) salary, holiday pay, overtime, commission and bonus payments. A deduction equivalent to the outstanding amount can then be taken from any final payment made to the employee.
To cover the event that the employee's final pay is insufficient to recover the total loan amount outstanding, the loan agreement should include a requirement for the employee to make a separate payment to the organisation within a set period of time after termination of the employment or to repay the outstanding amount in accordance with a schedule agreed with the employer. The loan agreement should make clear that if the loan is not repaid in accordance with the agreement and, where relevant, any agreed repayment schedule, the organisation may take legal action to recover the amount outstanding.