Q: I have an employee asking for a loan/pay advance. From an HR perspective, is that okay? If she were to leave prior to it being paid off, can we withhold the remaining balance from her last paycheck?

A: While you can legally issue an employee loan or pay advance, doing so introduces significant financial risk and administrative burdens that usually outweigh the goodwill generated.

If you choose to proceed, you should obtain a signed, written agreement before issuing the funds. However, recovering those funds from a final paycheck is rarely guaranteed due to strict wage laws:

• Under federal and many state guidelines, payroll deductions for loan repayments cannot drop an employee’s net earnings below the statutory minimum wage for the hours worked in that pay period. If the employee earns close to minimum wage or has a small final check, your ability to recoup the balance is severely limited.
• Payroll deduction laws vary drastically across the country. Some states require explicit, written consent at the exact time the deduction is made, while others strictly limit or entirely prohibit withholding loan balances from a final paycheck, regardless of any prior agreement.
• If an employee resigns unexpectedly and works zero hours during their final pay period, there are no wages to deduct from. 

The above rules often leave the company holding an unrecoverable debt, short of filing a civil or small claims lawsuit (which is generally too costly to consider).

Because recovering these funds is legally complex and often impossible, the recommended HR best practice is to deny the request.