Employer, Can You Spare a Dime?
With the ongoing credit crunch, many employees are finding it hard to get short-term loans. But employers that are considering filling that void via workplace loans should tread carefully, experts caution.
By Tom Starner
While America's Great Depression of the 1930s may be in the distant past, the phrase that pays today might just be an echo of that earlier time: "Employer, can you spare a dime?"
In this case, the would-be borrowers are employees and the workplace is where it happens. Workplace lending is emerging as a way for employers to offer attractive but inexpensive additions to employee benefits packages. At the same time, the ostensible concept is to help employees access emergency funds as traditional banks have tightened lending rules in the post-2008 recession era.
Indeed, new research from PwC finds nearly a quarter (24 percent) of 2,100 full-time workers surveyed say that "personal finances have been a distraction at work."
For many workers -- mostly lower-wage employees -- the only alternative had been to obtain so-called "payday" loans from predatory lenders who charge upwards of 400 percent to 500 percent.
Even with workplace loans' upside, however, HR and consumer experts (and some of the workplace loan vendors themselves) warn that employers should tread very carefully when deciding to offer such programs.
In its simplest form, workplace lending offers employees access to short-term cash loans -- typically for low amounts such as $500 to $1,000 -- with relatively short payment schedules. While there are often options for repaying the loans (by check, cash, etc.) the primary method is payroll deduction.
The idea is the loans can lessen financially-induced employee stress and, as a result, productivity can be maintained. To the latter point, a Society of Human Resource Management survey from 2012 reported that 83 percent of HR professionals say that personal financial problems have an impact on employee work performance. A potential downside for employers is getting involved in the credit business and all that might bring, even if they more often than not have little to do with the loans themselves.
In recent years, non-bank lenders, including companies, have begun to offer this new employee benefit nationwide.
"Workplace loan programs offer employees a benefit that can help them meet financial hardships," says Ken Rees, CEO at Think Finance in Fort Worth, Texas.
Besides increasing productivity, the loans provide employers with a valuable tool to build loyalty, says Rees. In the case of Think Finance's latest product, a line-of-credit loan program called Elastic, there are no additional costs or administrative responsibilities for the employer, because the product seamlessly integrates with company payroll systems.
For employees, Rees says that Elastic provides a more affordable way to address their financial concerns, noting it is not only less expensive than comparable bank products, like overdraft charges, it is significantly lower priced than payday loans.
According to the Federal Deposit Insurance Corp., for example, the average overdraft fee is approximately $35. Using Elastic, employees will pay $5 to borrow $100 and will have flexible repayment options, financial literacy tools and credit bureau reporting to help improve their credit.
"This real bottom line benefit to consumers is often ignored in the discourse over employer advance products," says Rees.
In fact, some of these new lenders combine employer loan programs with online tools and information focused on improving budgeting skills and other financial strategies.
"Stress reduction is the first step," says Mario Avila, CEO at Emerge Financial Wellness, in Nashville, Tenn. But he adds that Emerge's primary mission is to help workers achieve greater financial stability and a healthier financial outlook, which takes time.
John Bremen, a senior consultant at Towers Watson in Chicago, says workplace loans can be effective and not that much different from similar programs -- all in the name of employers boosting their benefits packages.
"We have seen an observable shift in levels of creativity and ways companies have approached the concept of pay and benefits over the past several years as the economic environment has forced employers to do more with less," says Bremen.
The most successful companies, he says, have identified programs for employees that employers may be in a unique position to offer, and that appeal to unique characteristics of their workforce demographics and preferences. So, for a retailer, it may be a more compelling merchandise-discount program. For an airline, a travel benefit. For a healthcare system, a specialized wellness program, or, for a professional services firm, flexible staffing or shortened weeks during the quiet season.
"Workplace loans are an example of a type of benefit that can be appealing to employees across a number of demographics," he says. "However, companies need to be very cautious in designing them, being mindful of numerous federal and state statutes and regulations, as well as public perception and concern by some consumer groups. In addition, some employee groups are ineligible for such loans altogether."
"Employers must be very careful and wary," says Lauren Saunders, associate director at the Washington-based National Consumer Law Center, and a frequent critic of most workplace loan programs. "Any payday-type loan concerns me."
Saunders says the key is the loan must be fair, affordable and responsible. But most of all, employees must have control over their situations.
"Employers should never turn over control of paychecks to allow first dollars to go to a lender in a way employees can't change," she says. "Even if it's affordable and properly underwritten, employees still need to have the ability to control how they repay it."
She says workplace loans should be for an occasional need, not a way to get into a cycle of debt. And they should be limited to once or twice a year so they don't enable [them] to get into a constant cycle of borrowing and repaying. The best alternatives for employees are not credit as a way to close the gap between income and expenses, Saunders says, pointing to budgeting, getting credit counseling or even going to family members for help as preferable to workplace loans.
"Workplace loans are so easy, almost too easy, to get," she says. "Yes, it's harder to budget, harder to save. But that's the point. Anything that an employer blesses in any way needs to be held to the highest standards, and used only on occasion."
Emerge's Avila says the number of workplace lenders is soaring for a reason -- there is a need for certain employee groups, those with low incomes in particular, who have few alternatives, if any.
But he also believes HR leaders should do their research and ask the right questions, including: How does this lending model work? Who is actually lending the money? How does the business make money? What is the loan structure, including the fees, interest rate, APR, terms and true cost to the borrower?
"Is it good for working people?" asks Avila, noting Emerge is primarily a social company offering a comprehensive financial wellness program focused on long term-behavior change, not a lender looking for a short-term payback. "Does it help them build wealth and improve their financial health? Or does it just keep them drowning in a slightly shallower sea?"
Avila says Emerge helps employees understand their overall financial stability through an assessment process. They then receive goal-setting tools, free credit scores, targeted and relevant text messaging, educational modules and custom solutions to help them develop budgets and improve their financial behaviors.
Oddly enough, the concept of workplace lending has been around since the days of the "company store," says Towers Watson's Bremen. And some employers across the country still offer payroll advances and loans to their employees.
"Once upon a time, workplace loans were a very normal part of the employee value proposition for many companies across the spectrum of industries," he says. "In fact, it was quite common for companies to provide loans that employees could use to purchase homes, automobiles or home computers, or to finance college educations for themselves or their dependents."
In fact, managers and executives utilized those programs as frequently as line workers. But as the concept of lifetime employment by a single employer trended down, and certain federal and state regulations made workplace loans less appealing or even illegal for some groups, the use of these programs trended down as well, Bremen explains.
Today, however, as companies try to differentiate themselves, and as they work to appeal to specific demographic groups and to increase retention and careerism on behalf of employees, Towers Watson is seeing vehicles such as workplace loans return. For example, Bremen knows a professional services firm that offers a "lifecycle rewards" program that includes loans to purchase a primary residence or finance graduate school.
"We also know several technology companies that use similar programs. So, it definitely can cut across demographic groups," he says.
Think Finance's Rees says the fact remains that an estimated three-quarters of all Americans live paycheck-to-paycheck with limited savings, and many of them have been marginalized by mainstream banking leaving very few real-world options.
Bremen says the best advice for employers is to be cautious and especially attentive to numerous federal and state statutes and regulations that guide such programs, as well as public perception and concern by some consumer groups.
"Employers should make sure there are safeguards in place to limit employee exposure to debt," he says. "These programs can be very effective, but -- again - consumer groups will point out, quite correctly, that there's a fine line between being a resource to employees and becoming a bank or finance company. It is important for companies to remember which side of the line to stay on."