Kingston Smith
+44 (0)20 7566 4000

Business Doctor: Employee quits, owing us money

TL writes: My company gave an employee a loan to help towards buying a car but he has just resigned. There is a considerable amount still outstanding and I’m not sure how best to recover it, as he has been a loyal member of my team. Can he work a notice period in lieu of the loan?

Employee loans are fairly common, writes Jon Dawson, partner at Kingston Smith LLP. If you had a loan agreement, it may specify how to deal with this scenario. If not, you have other options.

You could process your employee’s salary as usual during his notice period but retain the full net pay to be offset against the loan.

You could agree that loan repayments will continue after he has left, though this means you will not be able to claw back amounts automatically.

Or, if you are due to pay a settlement or payment in lieu of notice, it could be deducted from that.

In all cases, the loan repayments would be made after the correct tax and national insurance deductions from your employee’s income. It is not possible simply to sacrifice gross salary to offset against the loan, as he will be providing services to your company.

Consider taking legal action to recover the outstanding debt if an amicable agreement is not possible. While costly and best avoided, it would send a strong message to anyone else with a loan.