Payroll advance definition and meaning
A payroll advance is a financial arrangement through which an employee receives money earlier than their scheduled payday from their employer. The money is provided in the form of a short-term loan that is to be paid back to the employer with future earned wages. Agreements vary, but terms should be clear to both the employer and employee.
More about payroll advances
Sometimes employees use a payroll advance to bridge the gap between paychecks or when unexpected financial needs arise. Employers can arrange this type of advance — either directly or through a third party — in order to provide workers a portion of an upcoming paycheck. Such advances can be made anywhere from a few days up to sometimes a week or more ahead of time.
A payroll advance is usually initiated by an employee submitting a written request to their employer, which creates a paper trail. The request should also detail a repayment schedule so both parties understand when and how money is being paid back. In addition, both the employer and employee need to sign the agreement.
If the terms of repayment include deductions from the employee’s future paychecks, it’s very important to keep this authorization in writing. Many states do not allow deductions to be taken without the explicit consent of the employee.
In addition, it’s important to understand that the deductions taken from an employee’s paycheck to repay the advance cannot reduce an employee’s pay to below minimum wage. There are also legal guidelines surrounding how much interest can be charged by an employer on advances. Employers are not allowed to profit from making payroll advances and therefore are required to have reasonable interest rates.
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