We all know that employers may make certain deductions from wages for payroll taxes, medical insurance premiums, retirement plan contributions, and garnishments or court orders. But what about deductions to recuperate expenses where an employee breaks their company cell phone? Or where a cashier returns too much change to customers? The answer may not be as clear as you think. Here are common pitfalls to watch out for when it comes to deductions from employees’ wages.
No Deductions from Minimum Wages
Any deduction from employee wages should be authorized in writing by the employee. For example, it is not illegal to deduct from an employee’s regular paychecks for a loan made to an employee (so long as you do not deduct from the employee’s final paycheck – see below) if agreed to in writing between the employer and employee. However, the deduction should never cause the employee to earn less than the minimum wage for all hours worked in the pay period.
No Deductions from Earned Commissions
Once “earned,” commissions are considered wages. Accordingly, an employer generally cannot make deductions from earned commissions. However, there are situations where employers may want to deduct from commissions – say, for example, where the product, for which the commission was paid, is returned. This is only permissible where an employee takes an “advance” on a commission that is not yet “earned” pursuant a written commission agreement, which, among other things, should set forth the conditions that an employee must satisfy to earn the commission. For example, if a condition to the commission is that the customer does not return the product within 30 days, an employer may deduct from an advance of that commission if the customer returns the products 29 days after purchase. There are other scenarios in which employers may deduct against commissions, i.e., where conditions to “earning” the commissions have not been satisfied. Employers should carefully craft their commission agreements to allow for permissible deductions such as chargebacks, otherwise the deduction could be unlawful.
No Deductions for Simple Negligence
An employer may not deduct wages for employee mistakes and simple negligence. This includes deductions for things such as cash shortages and breakage or loss of equipment, which are inevitable in almost any business operation. These expenses should be borne by the employer, who can likely better absorb such losses or pass the cost onto customers. Using the cashier example, a mathematical error causing a cash shortage likely would be found to be simple negligence.
The rules are different, however, for dishonesty, willful acts, or gross negligence. If the cashier was returning too much change on purpose to defraud the company, that would be a different story. However, employers should tread carefully here, as they have the burden of proving the deduction was proper. If an employee is found not to have engaged in dishonesty, a willful act, or gross negligence, then the employee likely can recover the withheld wages and associated penalties.
No Deductions to Final Wages
Subject to limited exceptions, an employer may not deduct from an employee’s final wages, even if the employee has consented to it. This includes to collect on loans made to the employee and/or where the employee failed to return company property, such as a uniform, upon termination. To do so would likely be found a “willful” failure to pay all final wages due at termination, subjecting an employer to waiting time penalties of up to 30 days of the employees’ wages. As a reminder, a “willful” violation does not mean the employer failed to pay final wages out of malice or ill will, but rather that the employer knew the wages were due and simply did not pay them. Accordingly, wrongfully deducting from final wages could result in penalties in an amount higher than the actual deduction.
Deductions from wages can be easy fodder for wage and hour claims. Compliance often requires specific written agreements with the employee. It is easy to fall into the trap of making a casual oral agreement with an employee, when the employment relationship is good. However, failure to follow formalities can lead to costly penalties. If you are considering making deductions from an employee’s wages, the attorneys at Duggan McHugh Law Corporation are here to help you navigate California’s complex wage and hour laws.