What Exactly is a Staff Loan Agreement?
A staff loan agreement can be defined as an agreement that is entered into by an organization (usually an employer) and an employee in which the employer agrees to loan a specific sum of money to the employee. The employer will usually charge interest on the loan and set out the repayment terms.
Employers may offer loans, and specifically staff loans, to their employees as a way of supporting the employee during a difficult fiscal period with the intention of providing relief until they can secure financing from a commercial lender. In other instances, employers may enter into a staff loan agreement in an effort to assist their employees in making significant purchases or in dealing with unexpected expenses. Such examples may include helping the employee to:
If the employee is seeking these obligations from the employer, the employer must be cautious of its legal obligations under the law, as there are a number of rules that may apply including, without limitation, where the Labour Code of Canada and provincial/territorial labour and employment legislation, which requires that certain information be provided to the employee in connection with the loan agreement, such as the amount of interest charged and the appropriate means to calculate same. The employer may also be required to provide additional information regarding the terms of the loan.
Further, depending on the amount of the loan, the employer may be required to register the loan. In order to determine whether registration is mandatory, the employer should refer to the provincial/territorial legislation , which will also elaborate on any consequences that may result if registration is not timely completed. As a best practice, the employer should register the loan and its terms within 30 days of entering into the loan agreement.
One primary goal of these registration requirements is to protect the employee against lenders’ claims against the subject property if, at the time of the loan, the employee did not disclose to the lender that they have already taken on a loan on the same property. In addition to the foregoing, the employer should be cautioned that providing a staff loan may constitute a taxable benefit. This is especially true if the loan carries a lower interest rate than that available from a commercial lender or nothing at all. In such circumstances, the Canada Revenue Agency ("CRA") may deem the difference between the two rates to be a taxable benefit to the employee, and may require the employer to withhold and/or pay source deductions in the form of income tax, CPP and EI. Further, the CRA may conclude that the difference between such interest rates constitutes an indirect financial benefit to the employee, which could, in turn, be deemed to be a taxable benefit, which the CRA may require the employer to deduct and/or pay source deductions in the same form.
Any employer that provides a staff loan to an employee should therefore consider taking steps to ensure that the terms of the loan avoid the imposition of interest that would otherwise be found with commercial lenders. In doing so, the employer may avoid the additional burden of having to submit source deductions to the CRA and deal with any potential liability for the same that may arise.
Staff Loan Agreement Components
When constructing a staff loan agreement template, there are a number of key components that must be considered and included. These include the following;
Interest Rates
With staff loans, employers will tend to charge a reduced interest rate that is designed to reflect the cost of borrowing rather than making a profit. In most instances, the rate will be similar to the rate offered by banks or finance companies for a personal loan.
If the loan is not intended to generate a profit for the employer, they may argue that the interest component is simply a reimbursement for the administrative costs of keeping the account and payment processing, and the employee should be prepared to accept any modest fee charged for such services.
Repayment Terms
Many staff loan agreement templates will allow for the loan repayments to come directly out of the employee’s salary, meaning that the amount will be deducted from their pay and deposited directly into the account on agreed dates by the employer. For staff members who do not receive a salary, agreed payments will be made directly out of the funds that are deposited into their account, and all funds will be treated as part of the remaining balance until it has been fully paid off.
There may be also be early repayment conditions included in the template that allow the employee to close the loan early by repaying the remaining debt in one lump sum.
Default Conditions
Most staff loan agreement templates will include clauses that stipulate what might happen if a staff member defaults on their repayments. It may be the case that the borrower simply pays additional fees for administration costs, or it may be possible for the employer to withhold additional payments from the employee’s wages until the debt has been resolved.
The staff contract template may allow for the employer to terminate the employee’s contract if they refuse to meet the payment terms laid out in the agreement.
Advantages of Using an Agreement Template
Using a complete staff loan agreement template is more beneficial because:
a) It has all clauses a qualified solicitor would normally look to include and advise on;
b) The clauses provided are specific to your business needs and it can be tailored further if you need extra or specific clauses;
c) A template gives you a standard format to follow that ensures you put all the right information in the right places;
d) Even if you’re not legally trained, you’ll find it easier to identify any gaps or issues when you have a template;
e) Since it’s pre-written by a professional, you can be more assured that it covers everything (even if you need to amend clauses to specifically suit your needs);
f) It saves you time because you can set it up in an hour when doing it yourself rather than pay a solicitor to draft a contract, which could take days and cost up to £500;
g) A quality template will likely cover everything you need and you can just edit a few basic details for a reusable document;
h) It’s produced in a Word format, so you can easily highlight and replace text, and;
i) Templates come in a full set to cover all aspects of an employee’s employment, so you get everything as part of the same package which means you’ll never be without a correct contract or agreement.
Altering a Template to Suit Your Needs
Identifying your own needs and tailoring the general template to suit those needs can be very easy. For example, a simple change of the interest rate charged is a quick and easy start. If it is increased, your employees benefit less from the simplicity of the loan and in some cases may be better off finding a more cost-effective source of funding. If it is reduced, then you will suffer a bit more. Again, this is a subjective issue that needs real thought and care to give your staff the best terms while still ensuring that the company retains a positive outcome.
The loan term should also be adjusted to meet your organization’s needs. The salary deduction is clearly stated as an option and its duration and frequency can be altered easily. You must ensure you have some flexibility to alter its duration to fit the employee, try to match it to an annual pay cycle.
A final element to consider is any additional conditions and clauses that your organization prefers or requires. These can be added or left out as required. You may wish to give the employee the ability to bring someone with them to the meeting to discuss the loan, or you may require a second signature by a managing partner in larger organizations. This is often already included in the general templates so it is important to read through the document carefully to cross out or remove any elements you do not require.
Things to Keep in Mind Legally
When drafting a staff loan agreement, there are a number of legal considerations to keep in mind. Any provisions that impose a restriction on an employee (i.e. covenants, confidentiality, IP assignment, etc.) must satisfy the requirements of the general common law test for reasonableness. Such covenants must be reasonable with regard to the duration, geographical area and scope of activity concerned. The restriction must also be necessary to protect a legitimate business interest. The courts will not interfere with the liberty of employees unless this is necessary to safeguard the employer’s legitimate interests. Such interests may include trade secrets , confidential information and customer connection. If the restrictions in the contract are overbroad or unreasonable, then the court may declare them void, at least in part. However, an employer may in such circumstances be able to rely on the severance provisions contained in the restraint clause to the extent which the provision is so unenforceable as to mean that having regard to the balance of interests it is just and equitable to sever the offending provision and to enforce the remainder of the provision. There is no prescribed format for staff loan agreements. However, any agreement would need to be in writing if the amount exceeds R100,000.
Typical Pitfalls to Stay Away From
One of the most common mistakes made by companies is to either sign up to a staff loan agreement that does not work in practice or to fail to take advice in the first place.
In this article we will explain some steps you can take to avoid these pitfalls:
1. Make sure the staff loan agreement allows the company to charge interest at a higher rate on small loans
Many staff loan agreements contain clauses that state interest will be charged in line with HMRC requirements. However, if the company is charged £2 per month in interest but the official UK rate of interest is 4.5% that leaves 4.5% interest per month as free pay. This is clearly unreasonable and not allowed under UK law.
To avoid this problem the staff loan agreement should set a rate equal to normal market rates.
2. Ensure the staff loan agreement does not contain restrictions that require the employee to leave the company if they quit before the loan amount has been paid
Many companies use staff loan agreements that seem quite reasonable. Many employees signing them do not think these terms are unreasonable as long as the terms are kept secret. The reality is that these terms are not legally enforceable in the UK. Under UK law the employee cannot be forced to leave just because they have a loan outstanding.
If you have such a clause in your staff loan agreement it is recommended that you remove it. Alternatively you could limit it to loans over a certain amount so that it only applies to small loans.
3. Avoid creating an undue tax burden by offering tax free loans
Under normal circumstances, all employees would be subject to tax on the full value of a free loan. However, HMRC only allows loans under £10,000 to be classed as tax free. Anything above this value will be taxed in full.
Therefore, consider using interest in your staff loan agreements.
Creating a Staff Loan Program
To successfully implement a staff loan program, employers should follow a systematic process. The first step is to design the program in a way that aligns with the company’s policies and objectives. This includes determining the amounts of loans available, the purpose of the loans, and the eligibility criteria for employees. Next, the organization should draft a staff loan agreement template that clearly outlines the terms and conditions of the loans, including repayment schedules, interest rates, and the consequences of default. It is essential that both employers and employees understand their rights and responsibilities under the agreement.
Once the template is created, the company can then issue individual staff loan agreements to employees who wish to participate in the program. Before finalizing the agreement, both parties should have an opportunity to review the terms, potentially even seeking legal counsel if necessary. Upon execution, the company should maintain a record of the agreement and a payment schedule.
After issuing a staff loan agreement, the employer is responsible for monitoring the employee’s compliance with the repayment plan. This could involve setting up an automated system for deducting payments from the employee’s salary or manually tracking repayments. In either case, accuracy is crucial to avoid any potential disputes or claims from the employee.
Should an employee fall behind on their payments, the terms of the agreement will dictate the course of action the employer can take. It is important to handle these situations tactfully to preserve the employment relationship, if desired. Depending on the circumstances, the company may choose to modify the repayment plan or, in severe cases, pursue legal action if necessary.
Template for a Staff Loan Agreement
STAFF LOAN AGREEMENT
THIS LOAN AGREEMENT is made on the [insert date] between:
(1)PERSON A of [insert address] and
(2) PERSON B of [insert address].
WHEREAS the Lender has agreed to grant a loan to the Borrower; NOW IN CONSIDERATION OF the mutual covenants and agreements herein contained the parties hereto have agreed as follows:
Loan Agreement
1.The sum of [$INSERT LOAN AMOUNT] (the "Loan") shall be lent by the Lender to the Borrower on the following terms.
Loan Amount: [$INSERT LOAN AMOUNT]
Repayment Date: [$INSERT DATE]
Interest: N/A
Repayment by: A single lump sum on or before the Repayment Date.
Security: Unsecured
Covenants
2. The Borrower covenants with the Lender as follows:
(a) to repay the Loan to the Lender on or before the Repayment Date;
(b) not to make any alteration to the purpose for which the Loan may be applied without the Lender’s prior consent;
(c) to use the Loan in accordance with the purpose for which the Loan was made;
(d) to pay the Lender the amount outstanding under this Loan Agreement in full when it falls due .
Representations and Warranties
3.The Borrower represents and warrants to the Lender as at the date of this Loan Agreement and as at the date on which a payment is made by the Lender in pursuance of this Loan Agreement that:
Validity
4. The undertakings on the part of the Borrower contained in this Loan Agreement constitute legal, valid and binding obligations on the Borrower and are enforceable in accordance with their terms.
No Filing or Registration
5. No filing or registration in respect of this Loan Agreement needs to be made and no tax incurred by the Borrower in connection with this Loan Agreement.
Costs
6. The Borrower will pay on demand any costs (including legal fees) incurred by the Lender in connection with the preparation, negotiation, execution and enforcement of the Loan Agreement.
No Assignment
7. The Borrower may not assign the benefit of the Loan Agreement.
Governing Law
8. The Loan Agreement shall be governed by and construed in accordance with the laws of England.
