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Deduction of Prior Pay Advances


Deduction of Prior Pay Advances

Employees who require more cash than they earn on their normal pay-checks sometimes ask their employers for an advance on their pay. The need may be nonbusiness-related, such as a sudden medical crisis or to purchase a home; or it may be to buy something on behalf of the company. The most common example of the latter case is to receive funds for a company trip, for which the employee will be reimbursed once an expense report is submitted. In this case, it is most common to reimburse employees through the accounts payable system if there is a shortfall between the amount of expenses incurred and the original advance. However, if an employee neglects to turn in an expense report, then he or she is liable to the company for the amount of the advance that was issued. This is also the case when an employee has obtained an advance prior to his or her normal paycheck.


In all cases, the payroll staff must track the amount of outstanding advances and make deductions from employee paychecks to recover the amounts outstanding. Deductions frequently are made in smaller increments over multiple paychecks, so that employees have enough left for their personal needs. Managing this process properly calls for interaction with the accounts payable staff (who would have paid out the initial advances) and the employees (to determine the appropriate amount of deductions for each paycheck). Standard policies should also be in place that regulate the amount of advances handed out, and the speed with which they must be paid back. Such policies serve to ensure that a company does not become a personal bank for its employees and to minimize the risk of it losing outstanding advances if employees quit work before paying them back.

Example. Andrew Wodehouse, a warehouse worker, has requested an advance of $400 on his next paycheck. Company policy states that advances cannot exceed the net amount of an employee's prior pay-check, which limits the amount to $360. Mr. Wodehouse also requested that the advance be taken out of his pay over the next six paychecks, which would be $60 per paycheck. However, company policy requires all advances to be paid back within no more than four paychecks, so the amount deducted from his paychecks is increased to $90. After three paychecks, a garnishment order is sent to the company for a loan repayment that Mr. Wodehouse owes another creditor. He promptly quits work and disappears. But thanks to the company's strict rules for employee advances, only $90 is left on the advance that will not be paid back to the company.


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