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Neither A Borrower Nor A Lender Be: Work Loans

On Behalf of | Aug 11, 2016 | Employment Law

That is a quote from Shakespeare’s “Hamlet” and the point is lending money to friends can cause resentment and upon default of the loan the lender loses his money and his friend. The same applies to work loans. Lending or loaning money to your employer could strain the employment relationship. If you are borrowing from your employer, both you and your employer should clearly identify in a signed, written agreement what the loan terms are including when and how the loan is repaid not only to be legally protected but also to decrease the likelihood of a misunderstanding and feelings of resentment.  If both the employer and employee know the full terms of their agreement and can refresh their memory later by referring to a signed agreement they are more likely to live up to the deal struck between them.

Also under New Hampshire law, if the employer is deducting loan repayments from the employee’s wages that needs to be in writing and signed by the employee with clear indications when and how the payments are deducted and what happens if there is a balance due when the employee leaves the company. If, for any reason, the employee ceases making the payments he is obligated to make, the employer will want a provision in the loan agreement that allows it to collect its attorney’s fees and costs in pursuing the employee for the collection and also may have what is called a higher than normal default rate of interest in the loan agreement that encourages the employee to pay the employer when he has other bills to pay.  If there is interest charged the loan agreement should state whether there is a prepayment penalty of perhaps up to the full amount of interest that would had accrued if the loan was paid over the full loan term even if the loan is paid early or if upon early payment interest stops accruing. Usually lenders agree in the loan agreement that there is no prepayment penalty.

If the employee cannot pay it back under the planned time schedule, or if the employer is having cash flow problems and asks the employee to pay the entire balance back quicker and the employee is unable to do so, the employment relationship can become strained.  Under New Hampshire law, most employees are employees at will and the employer may decide to fire the employee because the employment relationship is strained.

An employee, who is perhaps an officer and a part owner of the employer, may consider loaning money to the employer company while it is has cash flow problems. If the company is not making payments pursuant to the loan terms and the employee is not in control of the company, he may have little recourse to enforce the loan agreement and keep his employment.  If the employee does have some control over the company and is paid back while other creditors are not being paid, those other creditors may be able to force that employee to pay them what he legitimately was paid back.  Also if later other investors consider funding the company, they are often unwilling to pay the employee who loaned his own monies to keep the company going.  The employee as a part owner of the company may, and in my experience often will, still take those risks due to the potential gain in developing a successful business but he should know those risks exist before the loan is made.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].