The situation

Employers regularly provide loans to employees. For example, to help with the purchase of a home, a move, education or training, or to bridge a temporary financial setback. This is often done out of good employer practice and is regarded as a practical arrangement within the employment relationship.

Many entrepreneurs assume that a properly drafted loan agreement, with clear arrangements on interest, repayment instalments and repayment, is sufficient. However, the ruling of the Court of Appeal of The Hague shows that this can be a costly misconception.

Despite a written agreement, the employer was ultimately awarded nothing: the entire claim for repayment of the loan was rejected.

This raises the question of how it is possible that an employer who intended to support an employee financially ultimately ends up empty-handed.

The legal issue

In a recent ruling by the Court of Appeal of The Hague, an employer had lent an employee an amount of €50,000 at an interest rate of 7% per year. It had also been agreed that any payment arrears could be set off against the employee’s salary.

After the employment relationship ended, the loan was not repaid. The employer then claimed repayment of the outstanding amount, plus the agreed interest.

The employer assumed that this was a regular arrangement within the employment relationship. The Court of Appeal ruled, however, that the mere fact that a loan is provided to an employee does not mean that only employment law applies.

An employer may also be regarded as a credit provider. If no statutory exception applies, an employer loan may fall within the rules on consumer credit.

That has significant consequences. A credit provider is subject to various statutory obligations. For example, the borrower must receive the legally prescribed information in advance, and, in many cases, there is an obligation to assess the employee’s creditworthiness before the loan is granted.

In this case, the employer could not demonstrate that these obligations had been met. The consequence was far-reaching: the employer’s entire claim was rejected.

What does this mean for entrepreneurs?

This ruling makes clear that a loan to an employee can have broader legal implications than many employers expect.

The fact that a loan is provided exclusively to an employee and arises from the employment relationship does not automatically mean that only employment law applies. Consumer law may also play an important role, imposing additional obligations on the employer as credit provider.

A carefully drafted loan agreement remains important, of course, but it is not always sufficient. The way in which the loan is granted and the steps taken beforehand may also determine whether a claim can later be successfully enforced.

In conclusion

Are you considering, as an employer, providing a loan to an employee? Without doubt, this is well-intentioned and reflects positively on you as an employer.

Our practical advice, however, is: think twice before doing so – or better yet: do not do it! Providing consumer credit is simply not part of the core business of your company.

Fortunately, there are often other and legally safer ways to support an employee financially during a difficult period or to offer encouragement, without the risks that an employer loan may entail.

Do you nevertheless wish to provide a loan? Make sure you obtain proper legal advice in advance.