At Earl Scheib Inc. of California, an automotive paint shop chain, most sales transactions are in cash, and only shop managers are authorized to handle cash. If there’s an unresolved discrepancy between the shop’s bank deposit records and cash transactions, the manager is asked to sign an “acknowledgment of reimbursement” agreeing to reimburse the company because his or her willful acts caused a loss to the company. The company then deducts the shortage from the manager’s wages.
Franklin Edwards, an Earl Sheib shop manager, claimed cash shortages were illegally deducted from his paycheck on three occasions. Each time he had signed a reimbursement form, and altogether $1,615.36 was deducted from his wages.
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.
Employee Sues; Consent Invalid
Edwards filed a claim against Earl Scheib alleging that state law barred deductions from employee wages for cash shortages, breakage, loss of equipment, and other losses resulting from an employee’s simple negligence.
A California Court of Appeal ordered Earl Scheib to reimburse Edwards for the deductions. The court explained that some cash shortages, breakage, and loss of equipment are inevitable in any business operation, and the employer must bear such losses as expenses. However, employers can withhold wages for cash shortages caused by the employee’s dishonesty, willful act, or “culpable negligence.”
There was no evidence here the cash shortfalls stemmed from any- thing other than simple negligence, so Earl Scheib couldn’t deduct the missing money from Edwards’ wages. And, Edwards’ signed authorization for each deduction had no effect because an employer cannot force an employee to agree to an illegal deduction.
Know the Rules
The court’s opinion underscores the risks of making improper payroll deductions. Here’s an overview of the rules regarding when you can and can’t withhold wages:
- Cash shortages and breakage. You generally can’t deduct losses from an employee’s pay unless they were caused by the employee’s dishonesty, willful act, or gross negligence-as opposed to a simple mistake. You may, however, discipline an employee whose carelessness caused losses, but you can’t threaten discharge if an employee refuses to allow a deduction.
- Debt repayment. You can deduct an employee’s debts to you, such as loans, wage advances, or purchases, but only if the worker agrees in writing. If the employee doesn’t consent, you can still ask for the money back, but you can’t take it out of their paycheck. Even with a signed agreement permitting payroll deductions, complications can arise. For example, if the employee is terminated before the debt has been fully repaid, it’s illegal to take a balloon payment for the remaining amount owed out of the worker’s last paycheck.
- Unreturned equipment. If an employee doesn’t return equipment or uniforms, you can probably deduct the cost from the final paycheck if the employee agrees in advance.
- Gratuities. Except in very limited situations, you can’t deduct tips or gratuities from an employee’s pay.
- Taxes and insurance. You’re allowed to deduct for amounts authorized by law or ordered by a court. You can also deduct for insurance premiums and pension plan contributions if authorized by the employee in writing.