Deducting from Paychecks

Deducting from Employee Paychecks

Overview: You must make certain deductions from the total compensation of both exempt and nonexempt employees. You are required to take out taxes and wage garnishments, if any. You can also take out money for certain work-related things. In addition, the employee can volunteer to have certain monies deducted. Special rules apply to deductions for salaried employees. You cannot collect previously paid wages from an employee. This prevents the fraud usually associated with kickbacks. It is also unlawful for you to withhold any part of a collectively bargained wage with intent to defraud an employee, a competitor or any other person. This prevents unlawful private agreements from nullifying collective bargaining contracts. The law also prohibits charging an employee for medical examinations required for employment or necessitated by law. You cannot make a deduction of any type unless authorized by law or by the employee's written consent to cover medical plans or insurance. No deduction can occur if it represents an attempt to evade minimum wage laws or a valid collective bargaining agreement. Secret payments from employees back to you also violate the Labor Code. Employers who fail to make agreed upon payments to a health or welfare fund, pension fund, vacation plan, or similar plan for the benefit of employees are guilty of a crime (felony if the amount unpaid is over $500). In 2014, it is also a crime for an employer to fail to remit withholdings from an employee’s wages that were made pursuant to state, local or federal law (such as payroll taxes).

Employee Tardiness: If an employee is tardy, you cannot deduct from the employee’s wages any amount in excess of the wage that would have been earned during the time actually lost. However, if the loss of time is less than 30 minutes, you can deduct 30 minutes of wages.

Simple Negligence: Because shortages and other losses occur without fault on an employee’s part, or as a result of simple negligence, you must bear these losses as part of the cost of doing business. You can discipline employees whose carelessness or simple negligence results in your loss. However, employers who threaten to discharge or discharge an employee for complaining about an illegal deduction may face a claim of violation of public policy and wrongful discharge.

Dishonest or Willful Act or Gross Negligence: You may deduct from the employee’s wages an amount sufficient to compensate for loss or damage resulting from gross negligence, willful misconduct or dishonesty. You may take such deduction from the employee’s wages during employment and/or from the final check. If you deduct from an employee’s paycheck any amount believed to be the result of gross negligence, willful misconduct or dishonesty, the burden of proof is on you to establish the weight of evidence for the withholding. If you fail to meet the burden of proof, you will likely be subject to waiting time penalties. Any doubt as to your ability to prove misconduct is therefore best resolved in a small claims or other court proceeding against the employee, rather than a deduction from wages owed that employee.

Employee Loans: You may not deduct from an employee’s final check any amount representing the unpaid balance of a debt owed by the employee, even though the indebtedness is contained in a written agreement to pay the full amount of the debt on demand, at termination or otherwise. The Labor Code states that no assignment of future wages can be made unless they are assigned for necessities of life — food, clothing or housing. Furthermore, the assignment must be made to the person supplying the necessities. If the employee is married, assignment of wages requires spousal consent.

Unreturned Tools and Uniforms: The Industrial Welfare Commission (IWC) Wage Orders provide that, in lieu of posting a bond, an employee can agree to a deduction from his/her last paycheck to cover the cost of tools, uniforms or other items you furnished that he/she did not return to you. However, based on decisions of the California Supreme Court and a California Court of Appeal, you cannot make deductions without proving theft or culpable negligence, even where the employee signed an agreement authorizing the deduction.

Meals and Lodging: You can credit meals and lodging that you supply as part of an employee’s compensation against state minimum wage obligations. Meals must include a variety of nutritious foods. Lodging must meet customary standards of adequacy and sanitation. You cannot deduct from the minimum wage for meals and lodging unless the employee authorized a deduction in writing and actually uses the meals and lodging. You cannot require employees to share beds. If, as a condition of employment, the employee must live at the place of employment or occupy quarters you own or under your control, then you cannot charge rent in excess of the values listed in the following table. The minimum wage order limits the extent to which meals and lodging can be credited against the minimum wage. The meal and lodging credits changed again on July 1, 2014 when the new minimum wage became effective.

Child Support: Your obligation to withhold child support owed by an employee pursuant to an appropriate order is even more extensive than the requirements about other garnishments. The law holds you responsible for your employees’ child support obligations. You face severe penalties for noncompliance in some cases. You may become liable for the full amount of a child support claim filed against the employee plus interest, cost and penalties. The law requires each state to establish standard award guidelines and make child support payments as certain as tax payments through automatic wage deductions. Be aware of the following general provisions of this law:

You can deduct and retain $1.50 from the earnings of the employee for each payment made pursuant to a Wage and Earnings Assignment Order for child support. This fee is in addition to the amount ordered to be withheld on the Wage and Earnings Assignment Order. You cannot make retroactive deductions.
The law prohibits job discrimination based on automatic child support withholding. You may open yourself to state and federal penalties if an applicant claims discrimination based on employment inquiries about child support obligations. An increase in payroll costs due to child support withholding is not a valid reason for rejecting an applicant.
State and federal law prohibit terminating an employee for child support withholding, garnishment or threatened garnishment.
For a former employee, the law requires that you provide, in writing, the employee’s last known address and new employer’s name and address, if known. You also must keep the order on file and honor its provisions if the employee returns to work.
Although you need not notify the employee about the withholding notice, it is a sound practice. Advise the employee of the date the notice is received, the date withholding begins, the amount to be withheld and the requirement that you must comply with the order.
You must comply with the child support withholding order as written until directed otherwise by the issuing agency or the court, even if the employee insists the withholding order is incorrect. Refer the employee to the local child support enforcement office to correct any inaccuracies.
Child support claims take precedence over all other claims, except taxes. If the total amount to be withheld exceeds 50 percent of net disposable income, contact the state support enforcement agency for guidance.
You must pay multiple child support garnishments in pro rata shares, with current support payments taking priority over past due support still owed. If the total amount exceeds the limit that state and federal laws exempt from a portion of the employee’s wages or if out-of-state orders are involved, ask the local child support office for guidance. If you are a multistate employer, an order delivered to your representative in the issuing state but applicable to an employee working in another state binds you to the issuing state’s laws.
When you receive the child support order, mark the date received on the notice and retain the envelope with its postmark in case timely compliance becomes an issue. Federal law requires that withholding begin no later than the first pay period occurring after the mailing date of the notice. The wage withholding order requires delivery of the withheld child support within 10 days.
You may stop child support withholding only upon order from the state’s child support enforcement agency or the court. You must inform the appropriate agency if an employee subject to wage withholding leaves. You must resume withholding immediately upon the employee’s rehire. Establish a standard procedure for processing child support withholding and garnishment orders. Apply that policy consistently and include any confidentiality guidelines. In addition, because of the emotional nature of orders in some situations, train your payroll coordinator not only on law and compliance procedures, but also on organization policy for handling distressed employees.

Deductions for Overpayment of Wages: You may not know the exact amount of hours that an employee worked in a pay period, for several reasons:

The employee failed to turn in a time record
The record was lost or misplaced
The employee is absent or on leave

Employers will often pay an employee for the hours the employee was scheduled to work and address any overpayment at a later date. Historically, employers may have made deductions in the next payroll period, either with or without the employee’s written authorization to do so. Because of the Labor Commissioner’s strict adherence to case law, as well as the Labor Code, this action involves risk. The Labor Commissioner’s office addressed a question about frequent overpayment and immediate deductions from the next payroll. Dated November 25, 2008, the opinion letter refers to many of the same cases that are discussed in previous topics. In the case in the opinion letter, the employer had a 75-hour payroll period. Payment was made prior to the end of the pay period. The employer paid for time that was scheduled to be worked, but might not have actually been worked. The opinion letter noted that the overpayment was a result of the employer’s policy of paying wages before the end of the pay period. The DLSE couldn’t find anything in the law that prohibits an employer from making deductions if they are “predictable and expected wage overpayments made in the immediately prior paycheck that resulted from the employer’s payroll system, if the employee provides voluntary, written authorization.” You cannot make deductions from the employee’s final paycheck for over-payments, because you would face penalties under Labor Code section 203. NOTE: Do not rely upon DLSE opinion letters as legal precedent. Courts need not follow the opinions. If your payroll system pays employees before the end of the pay period, consult with legal counsel to determine how to handle any over-payments.

Garnishments Against Wages: Employers occasionally receive court orders garnishing an employee’s paycheck for payment of child support or other debts. The law places limits on the percentage of wages that can be withheld, depending on the type of garnishment. You can deduct $1.50 from the employee’s earnings for each payment made in accordance with any garnishment order. A law regarding the amount of earnings that can be garnished went into effect in 2013. This law increased the amount of wages exempt from garnishment from the federal standard to a new higher California standard. On July 1, 2013, a law went into effect stating that a withholding order cannot exceed the lesser of the following:

25 percent of weekly disposable earnings; or
The amount by which the weekly disposable earnings exceed 40 times the state minimum hourly wage in effect.

The law clearly defines “disposable earnings” as the portion of an individual’s earnings that remains after deducting all amounts required to be withheld by law. Different limits apply for child support (50 percent of amount remaining after deductions). If you receive a garnishment order, follow these general guidelines:

Advise the employee of the court order and the date the first deduction will be made.
Do not garnish a paycheck for more than the amount allowed by law. However, the courts enforce that limitation; you do not.
Do not terminate an employee because his/her wages are garnished for the payment of one judgment. A judgment against an employee is a single debt, regardless of the number of garnishments based on it. You can discharge employees for garnishments for multiple judgments other than child support. However, consult legal counsel before doing so.
Keep a copy of the court orders in the employee’s personnel file as the legal basis for making the payroll deduction.
If an employee is subject to multiple garnishments, pay child support payments first.