Figuring out what deductions from an employee’s wages are permitted and prohibited under the law is a quandary. May an employer deduct an employee’s wages for personal charges on the company’s credit card? What about the cost to replace company property the employee lost or damaged? And what if an employee resigns and never returns the company-issued laptop or other tools of the trade used by the employee? Advances or loans to the employee? The scenarios are seemingly endless. However, by taking the following steps, employers may find the answers to their deduction dilemmas.
When uncertain whether a deduction is permissible or prohibited, the first step is to determine if the employee at issue is classified as exempt or non-exempt from minimum wage and overtime pay under the Fair Labor Standards Act. (If the FLSA does not apply to your company or employees, then you may skip to step two.)
If the employee is exempt from both minimum wage and overtime pay under the executive, administrative, or professional exemptions, then with very limited exceptions, the employee must receive his or her full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. An employer may only make deductions from an exempt employee’s predetermined salary if the deduction falls within one of the permissible deductions set forth in the FLSA regulations, 29 C.F.R. 541.602(b). If improper deductions are made from the salary of an exempt employee, the employer may risk losing the exemption during the time period of the deduction for not only the employee at issue, but also for other employees in the same job classification.
Some of the narrow circumstances in which such deductions can be made from the salary of an exempt employee include when an employee is absent for one or more full days for personal reasons other than sickness or disability, or before the employee has qualified for or after the employee has exhausted PTO. Deductions can also be made for penalties imposed in good faith for infractions of safety rules of major significance, such as those relating to the prevention of serious danger in the workplace or to other employees. Unpaid disciplinary suspensions of one or more full days may imposed in good faith for infractions of workplace conduct rules, but only if it is pursuant to a written policy applicable to all employees.
If the employee is non-exempt, and assuming the deduction is otherwise permissible under steps two and three that follow, then the cost of any items which are considered primarily for the benefit or convenience of the employer may be deducted from an employee’s wages so long as it does not reduce the employee’s wage for the workweek below the applicable minimum wage or cut into any overtime compensation due to the employee. If after performing the relevant calculations, an employer determines that making the deduction will reduce the employee’s wage for the workweek below the minimum wage or cut into the employee’s overtime compensation, then the employer may prorate the deduction over a period of paydays.
Importantly, an employer cannot avoid the minimum wage and overtime requirements of the FLSA by having the non-exempt employee reimburse the employer in cash instead of deducting the cost from the non-exempt employee’s wages.
The second step is to determine whether applicable state law specifies deductions that are prohibited or permitted under the law. However, many state laws prohibiting deductions from wages provide an exception when an applicable federal or state law expressly permits a deduction from wages under the circumstances, such as California Labor Code Section 224, the Illinois Wage Payment and Collection Act, 820 ILCS 115/9, and New York State Labor Law Section 193.
Step three is to determine whether there are any applicable federal or state laws that expressly permit the deduction. For example, under the Family and Medical Leave Act, if an employer pays its share of health plan premiums for an employee while he or she is out on unpaid FMLA leave and the employee fails to return to work after leave entitlement has been exhausted or expires, the employer may deduct the cost from sums due to the employee as long as (1) the employee’s reason for not returning to work does not fall under one of the two exceptions in the FMLA regulations, 29 C.F.R. 825.213(a), and (2) the deduction does not otherwise violate applicable federal or state wage payment laws or other laws (e.g., cause a non-exempt employee’s wages to fall below minimum wage). The FMLA regulations provide that an employer may recover the costs through deductions from any sums due to the employee, such as unpaid wages, vacation pay, or profit sharing.
Consult with labor and employment counsel to determine whether there are additional restrictions on deductions imposed by applicable case law. This is particularly important if the employee at issue works in California, as various additional restrictions on deductions have been imposed by the courts as set forth in case law.
Unauthorized deductions can result in serious consequences, especially when made from the salaries of exempt employees. Undertaking this four-step analysis and consulting counsel when in doubt can help protect the business.