The loan of money by an employer to an employee

Companies can lend money to their employees. This practice demonstrates the employer’s desire to help the employee overcome a temporary financial concern. The employer is not a bank and therefore does not take guarantees but relies on the monthly salary to reimburse itself over time. This loan is to be distinguished from a salary advance , which consists of paying the employee the salary corresponding to work already carried out.

The rules to follow in French labor law so far are as follows:

1. The employer must always respect the distinction between the salary which is paid to the employee in return for his work and the repayment of the loan, in order to avoid a possible reclassification of the loan as a salary advance and its consequences, such as in particular the reinstatement of the loan in the contribution base. It is therefore imperative not to make payroll deductions , but to plan for repayment of the loan by check or transfer;
2. Furthermore, we must not forget the tax aspect of the loan because the employer and his employee are required to declare to the public finance center any loan granted for an amount exceeding 5,000 euros ;
3. Finally, when the amount loaned without interest by the employer exceeds 1,500 euros or when the interest rate is higher than the legal rate, the drawing up of a loan contract is obligatory. This contract formalizes the purpose and conditions of the loan. It provides in particular the terms of repayment of the loan by the employee such as the amount of due dates and interest, the dates and methods of payment or even an amortization table. The fate of the loan in the event of termination of the employment contract must also be anticipated.

However, these loans granted by companies to their employees risk losing their interest due to a judgment of the Court of Cassation of June 5, 2019 , issued following a preliminary ruling from the Court of Justice of the European Union ( CJEU ) . .

The loan to employees by the employer treated as a loan to a consumer

The European Court of Justice responded on March 21, 2019 to a preliminary question on this subject. In this case, it was a conflict between the company Electricité de France (EDF) and a former employee who had resigned.

In fact, the company had granted a real estate loan of 57,625 euros to this employee. The loan contract provided for a clause for automatic termination of the loan in the event of termination of his employment contract. Following his resignation, the company demanded immediate repayment of the sums lent.

For the trial judges, it was not an unfair clause because the employer is not a professional, even if the company had an internal department which managed loans to staff. In the same way, for these judges, the employee does not have the status of consumer within the meaning of article L. 212-1 of the Consumer Code because the advantages offered by the loan contract have the effect of balancing the automatic termination clause.

Faced with this reasoning and in order to know whether or not the two parties to the contract had the status of professional and consumer, the Court of Cassation referred a preliminary question to the CJEU

In its decision of March 19, 2019, the CJEU indicates that within the meaning of directive 93/13 of April 5, 1993 , the employee who concludes a credit contract with his company, reserved primarily for members of staff and intended to finance the acquisition of real estate for private purposes, must be considered as a consumer. Likewise, the employer must be considered a professional within the meaning of this directive when he concludes a credit contract as part of his professional activity, even if it is not his main activity.

The application of consumer law to employee loan contracts

Drawing all the consequences of this judgment, the Court of Cassation judges that the termination of the loan granted to an employee due to the termination of his employment contract is abusive. The clause in fact creates a significant imbalance between the rights and obligations of the parties to the detriment of the employee who must face a sudden worsening of repayment conditions and a substantial modification of the loan contract. The Court of Cassation thus applies its classic case law according to which the clause which provides for the forfeiture of a loan for a cause external to the contract is abusive.

Following the decision of the Court of Cassation of June 5, 2019, it is now appropriate to apply the provisions of the Consumer Code to the loan granted by an employer to its employee.

Despite the fact that the loan of money by an employer to its employee is generally granted in a logic which is not at all lucrative, the employer must assume compliance with the numerous obligations which weigh on professionals in the banking sector. And yet, the employer does not have the same internal services as a bank. However, non-compliance with these obligations exposes the lender to criminal sanctions and, for certain breaches, to forfeiture of its rights to interest. This case law is therefore a source of complexities which could unfortunately discourage certain employers from lending money to their employees, despite all the good intentions which motivate this act.

In addition, the question now arises as to the extent to which consumer law should be applied in the case of loans made by an employer to its employee. For example, must the employer assess the solvency of its employee, even though it very rarely has information on the employee’s expenses and debts? Or, is compliance with the usual rule which requires that maturities be capped at 33% of the employee’s net income recommended? Due to these uncertainties, anticipation of these risks is timely. It therefore appears reasonable to respect all consumer law.