Loan from employer has its hazards
Published 10/22/04

Borrowing money from your boss has complications. There are several issues that an employer and employee should consider in regards to such loans. First, they should decide if it is to be an advance on wages, salary, commissions or bonus, and if so, there should be a specific written agreement between the parties acknowledging this and authorizing specific credits or deductions from the compensation that would have otherwise been due the employee but for the advance.

If the loan is not in the form of an advance, then it is prudent to have a promissory note signed by the employee in favor of the employer setting forth the specific repayment terms and stating whether interest is charged. It is important to understand that under New Hampshire law, unless the promissory note specifically allows for prepayment, then a prepayment is a breach of the note. While at the outset, the employer may be more than willing to encourage prepayment with such a clause, if it is left out and the employer/employee relationship becomes acrimonious and interest is charged, the employer may insist on no prepayments when the note is silent on the issue.

Promissory notes payable on demand by the employer are just as enforceable as those with a stated maturity date and periodic payment terms. However, a promissory note payable merely on the demand of the employer may be argued by the employee to have truly been intended as compensation rather than a loan. If that is true, such a misrepresentation in the financial records of the employer could amount to fraud on the IRS, creditors, and/or investors, as well as tax fraud by the employee if the income is not reported on his tax return.

While a demand note is perfectly legitimate, given the unique relationship between employer and employee not shared by other creditors and debtors, the employer should be careful about even the appearance of impropriety and it may be better served by using a term loan rather than a demand loan.

If the employee does not agree to repay the loan by deduction from his employment compensation under written specific terms, then the employer as a creditor of the employee may not offset the employee's compensation against missed loan payments, and must resort to traditional creditor remedies to collect this loan.

Employers should also be cautious as to inconsistent characterizations of a loan. For example, if an employee is using the money as down payment for a house and the bank or mortgage company wants to see that this money is not being borrowed, an employer who assists an employee in a misrepresentation to the bank that these monies were not borrowed could be subject to liability for that misrepresentation and further possibly provide a later defense to repayment by an employee who has already shown his willingness to misrepresent the truth.

Employees who do enter into such loans should also remember that unless they have a contract to the contrary, they are generally employed at the will of the employer. If in the future they are having cash flow difficulties it would be very unwise to become delinquent in the loan from the employer, whose good graces the employee relies upon for the retention of his job.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.