Ensuring the Legality of Pay Check Deductions | DCR Workforce Blog

Ensuring the Legality of Pay Check Deductions

Between the IRS and the Department of Labor (DOL), when making deductions from employee pay checks employers can be forgiven for feeling like the great Odysseus himself, as he wended his way between Scylla and Charybdis, taking care not to face a complete disaster. This fact is proven time and time again by the various companies which are penalized by the Wage and Hour Division of the DOL for unlawful deductions made by them to employee pay checks.

When an employer deducts wages from their employee without agreement or statutory authorization it is deemed an unlawful deduction. The confusion, and non-compliance, results from a misunderstanding of:

  • What is covered under “statutory authorization”?
  • Thresholds that must be maintained regarding “minimum wage”
  • Whether the deduction is deemed to benefit the employer or the employee

In some cases, employers may legally take deductions that result in the employee receiving less than the minimum stipulated wage (whichever is the highest of federal, state and municipality).  However, the Fair Labor Standards Act places complex conditions on this ability, such as the employee’s exempt/non-exempt status, whether the employee has worked any overtime hours, absences that are determined in advance as not being compensated for, and other factors.  Failure to properly navigate through these regulations could result in serious punishment under the FSLA..  Some states restrict wage deductions also and employers need to be aware of these details too, as workers who commute from such states will be governed by those rules.

The conditions under which deductions can or must be made include:

  • When required or empowered to do so by a state or federal law.
  • Applicable employee taxes. The tax deducted can in no way be the employer’s share of any kind of tax.
  • Deductions expressly authorized by the employee for third parties like unions, insurance premium payments, benefit plan contributions or other deductions.
    • Health, welfare, or pension contributions as expressly authorized by a collective bargaining agreement.
    • Payment to a creditor as a garnishee order, attachment or other claim – as long as the deduction does not result in a profit to the employer.
    • Reasonable cost of board, lodging and other facilities if and when they are provided to an employee for the benefit of the employee; provided it does not benefit the employer or any person affiliated to the employer. The employer may have to substantiate the fact that the charges levied were reasonable and must keep the receipts on file.
    • Cash register shortages may be recoverable with an additional possibility of termination (within the stipulated minimum wage clause).
    • Wage deduction for late arrival to work, without exceeding the proportionate wage for the time lost, to the nearest half hour.

However, an employer cannot:

  • Collect, take, or receive any gratuity given to or left for an employee, or deduct any amount from wages due an employee on account of a gratuity left for an employee.
  • Collect any dues in a single installment even when the employee authorizes such payment in writing.

The DOL considers all the following as being for the benefit of employers and not employees:

  • Uniforms, renting or laundering them or any related expense required by an employer.
  • Tools and materials provided on the job, to carry on the business of the employer.
  • Loss of/damages to property or vehicles etc.
  • Financial losses resulting from negligence
  • Dues not collected from customers
  • Insurance claims
  • Any expenses resulting from obeying the employer’s instructions

While making deductions, the employer needs to remember the DOL stipulation that wages cannot fall below the applicable fair minimum wage. When the amount owed exceeds the stipulated minimum, the employer may spread out the deductions over a period of time, and recover what is due.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.