WWYLD 5/30/18 – Proceed with Caution When Deducting from Pay

May 30, 2018 |

At least once a week, I receive a question from a client asking whether a deduction can lawfully be made from an employee’s paycheck.  Especially for employers who operate in multiple states, navigating the federal and state wage and hour laws that govern deductions can be challenging and can limit an employer’s ability to consistently implement and enforce paycheck deduction polices for employees nationwide.  This week’s WWYLD illustrates the complexity employers face.

Question: We have an employee resigning.  We offer company accounts to employees that may be used to purchase products we sell.  We offer this benefit to all employees and set up weekly payroll deductions.  The terminating employee has a balance due of $60.  Do we have an issue deducting this from her final paycheck?  Also, we deduct for uniforms provided but lost or destroyed.  Any issues with this? 

Federal Law

Generally, under the Fair Labor Standards Act (“FLSA”), deductions from regular or final paychecks are permissible as long as the deductions do not cause the employee’s pay to drop below minimum wage.  Therefore, under Federal law, it is permissible to deduct the cost of the unreturned uniforms as long as the deduction does not bring the employee’s pay below minimum wage.

There are certain deductions that can be made that take the wages below minimum wage owed.  One such deduction is for repayment of loans and cash advances.  The other is for contributions to funds established for the benefit of employees.  Under federal law, you could deduct the $60, even if that brings the employee’s pay below minimum wage, because that $60 is to repay a loan/advance.

State Law

But, before we determine whether we can permissibly deduct from this employee’s paycheck, we must look to the law of the state in which the employee works.  Many states have wage and hour laws that are far more restrictive on employers than the Federal FLSA.

For example, if this employee worked in:

Massachusetts:  In Massachusetts, it’s unlawful to charge an employee for her uniform.  So, that cost could not be deducted from a MA-based employee’s paycheck.  Massachusetts also treats the deduction for the loan differently.  Massachusetts courts have stated that a deduction “where there is proof of an undisputed loan” is permissible as long as it does not bring the employee’s pay below minimum wage.

Iowa:  Iowa law states that wages cannot be withheld unless required by law/court order or at the written authorization of the employee.  Even with written authorization, an employer cannot withhold wages related to:

  • Cash shortages in common money till (with certain limited exceptions)
  • Losses due to breakage, damage, acceptance of bad checks, and default of customer credit unless the employee abused the discretion afforded to him/her by the employer or the loss is caused by the employee’s willful and intentional disregard for the employer¹s property
  • Lost or stolen property unless the property is equipment specifically assigned to, and receipt acknowledged in writing by, the employee from whom the deduction is made

Under Iowa law, as long as the employer has a written agreement, it would be permissible to deduct the $60 for the loan/cash advance.  While Iowa law generally prohibits deductions for lost/stolen property, if the uniform was specifically provided to this terminating employee, the deduction for lost uniforms would be also permissible if there is a written agreement.

Minnesota:  In Minnesota, an employer needs to have specifically timed authorizations in order to take lawful deductions.  For loans, the employee must have voluntarily agreed to the deductions before the loan was taken.  But, for uniforms, the authorization must be after the loss and before the deduction.

Practical Tips

Don’t operate in Massachusetts, Iowa, or Minnesota?  These just serve as examples – nearly every state has its own wage and hour laws that dictate when and how employer may make deductions.  So, navigating these questions is relevant to all employers.  It’s imperative that employers understand not only the parameters established by the FLSA, but also the state-specific laws that apply to their workforce.  Policies and practices that work in one state may have to be modified to be lawful in another state.  If you need assistance understanding the laws that impact your organization, need a review of your current pay practices, or need carefully drafted pay-related polices, we can help.

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