If an employee breaks or loses a valuable piece of equipment, or a worker owes you money from a loan, you may be tempted to make a deduction from the person’s next paycheck. But you need to act cautiously because there are strict rules governing exactly when you can and can’t take money out of an employee’s wages. And making a mistake can be costly. One California employer who fired an employee for objecting to a $35 wage deduction now faces an expensive wrongful termination lawsuit.
Employee Asked To Pay Towing Charges
The recent case involved Eugene Phillips, who worked as a “casual employee” for North Hollywood-based Gemini Moving Specialists. One day, Phillips inadvertently put the wrong type of fuel in a moving van, and the truck had to be towed and refueled.Gemini asked Phillips to pay $35, one-half the towing cost. Phillips verbally agreed, as long as it wouldn’t be taken out of his next paycheck because he needed to pay his rent. The employer, however, withheld $93.75 from his next check. It later refunded him $58.75 (netting a $35 deduction).
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Deduction Questioned
After the towing incident, Phillips didn’t receive any more work assignments. He eventually asked why he wasn’t getting work and why the company had ignored his request about the timing of the payroll deduction. A few weeks later, Phillips was terminated.Phillips then sued Gemini. He charged that the wage setoff was illegal and that he was wrongfully terminated for questioning the deduction. The company countered that Phillips was an at-will employee who could be fired at any time for any reason.
Fired Worker Can Sue For Damages
The California Court of Appeal ruled Phillips could pursue his lawsuit. The court cited California’s clear public policy protecting an em- ployee’s right to be paid wages free of setoffs and deductions. If a jury decides that Phillips was fired in retaliation for asserting the right to receive his earnings, Gemini could be ordered to pay hefty damages.
Wage Setoff Rules
This case focuses attention on the fact that taking money out of an employee’s paycheck can be risky and might open the door not only to claims for unpaid wages and steep penalties from the Labor Commissioner, but also to expensive litigation. Part of the problem is that there are several little-known rules dealing with paycheck deductions. Here’s an overview of when you can and can’t dock an employee’s wages:
- Cash shortages and breakage. If cash comes up short or an employee loses or breaks equipment, you generally cannot deduct the cost from the person’s pay. Losses such as these are considered a cost of doing business. If the loss is the result of an employee’s dishonest or willful act or their gross negligence-as opposed to a simple mistake, like putting the wrong gas in a truck-you can make a deduction, but it’s still risky. Unless you have well-documented proof that the employee intentionally did something wrong, the Labor Commissioner or a court might not agree with your conclusion, leaving you open to a dispute.
- Repayment of debts. In general, you can deduct for money owed to you as a result of a loan, wage advance or employee purchase, but only if the worker agrees in writing. If the employee doesn’t consent, you’re still entitled to get the money back, but you can’t take it from their pay. This means you might have to sue in small claims court. Also, complications can arise even if there is a written agreement allowing payroll deductions. For example, if the person’s employment terminates before you have been repaid in full, it’s illegal to simply take a balloon payment for the remaining amount owed out of the last paycheck. You can do this only if the employee signs a separate written agreement at the time the final paycheck is issued. Note that if you accidentally overpay an employee and if the mistake is caught quickly, you can usually deduct the excess amount from the person’s next paycheck without a written agreement.
- Failure to return equipment or uniforms. If an employee fails to return equipment or uniforms, you can probably deduct the cost from the final paycheck as long as the employee agrees in advance. To avoid problems, make sure workers sign such an agreement before you distribute equipment or uniforms.
- Commissions for returned goods. If you have paid an employee a commission on a sale and the goods are returned or the sale is cancelled, you can deduct the commission as long as the return or cancellation can be traced to the employee who made the original sale. But you’re not allowed to dock employees’ paychecks for “unidentified returns” that can’t be traced to a particular salesperson.
- Gratuities. Except in very limited situations, you can’t deduct tips or gratuities from an employee’s pay.
- Taxes and insurance. You’re clearly allowed to make deductions for taxes authorized by law or amounts ordered by the court. You can also deduct for insurance premiums, pension plan contributions and hospital or medical dues as long as the employee authorizes it in writing.