HR Management & Compliance

Deductions from final paycheck: Recovering loans and damaged property

Deductions from final paychecks can be very tricky, and in fact are often not allowed by law. What should an employer do if it’s owed payment for a loan or for damaged property? Can these amounts be deducted from the final paycheck?

Deductions from final paycheck: Recovering loans

Employers’ hands may be tied when trying to use deductions from the final paycheck to recover these balances owed.

“Employers may deduct amounts from an employee’s gross earnings when the deduction is authorized in writing by an employee for a valid obligation, such as a payment for a purchase or the repayment of a loan.” Nicole A. Legrottaglie explained in a recent BLR webinar. However, the Division of Labor Standards and Enforcement (DLSE) will allow the employer to deduct only the amounts authorized for each pay period, even when the employment ends. It will not permit a balloon payment to be recovered from a final check—even if it is specifically authorized by the employee when he is hired or incurs the indebtedness.

There is one possible DLSE exception in this scenario, which is if the employee enters into a new, valid agreement at or before the termination that expressly authorizes the deduction of the full balance owed from the final check. This new agreement must be in writing.

Absent that, the primary remedy for repayment is to use small claims court.

Deductions from final paycheck: Recovering funds for damaged property

Employers face another conundrum when seeking money for damages caused to company property. In California, any losses that are not the product of an employee’s fault or culpability represent a normal cost of doing business and therefore must be borne by the employer. There is no recourse in this case.

However, if these amounts owed are due to dishonesty or gross negligence on the part of the employee, then the Wage Orders establish an exception to this general prohibition. When the employer can show that the cash shortage, breakage, or loss was caused by a dishonest or willful act of the employee, or by the employee’s gross negligence, then the employer may be able to collect. That said, employers are advised to exercise extreme caution before making any deductions from final paycheck or requiring any reimbursements. If you are not sure, contact an attorney to ensure the deductions you’re making are lawful.

For more information on making deductions from final paychecks, order the webinar recording of “Final Pay: Understanding Your Rights and Obligations When the Employment Relationship Ends.” To register for a future webinar, visit CER webinars.

Nicole A. Legrottaglie is an attorney in the Sacramento office of Carothers DiSante & Freudenberger LLP. She defends her clients in a broad range of employment claims, including claims of discrimination, retaliation, harassment, wrongful termination, ADA/FMLA compliance, wage and hour, contract disputes, and unfair business practices.