Here are two interesting questions related to deductions from final paychecks of employees. Both are interesting scenarios and serve as reminders to employers that their state laws should be referenced before making decisions about deductions from pay.
Question 1: I have question about the last paycheck that I am paying to our employee. Employee has child support and the amount exceeds the final gross income. I will need to withhold up to 50% of disposable income for child support. I am not sure when I am calculating the disposable income whether insurance premium is part of mandatory deductions or not?
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Mandatory deductions include federal, state, and local taxes; unemployment insurance; workers’ compensation insurance; state employee retirement deductions; and other deductions determined by state law. Health insurance premiums may be included in a state’s mandatory deductions; they are mandatory deductions for federal employees.
A Michigan website contains a document with questions and answers on this issue.
Also, the following excerpt comes from another Michigan document containing information on child support:
- What are disposable earnings?
“Disposable earnings” means “that part of the earnings of any individual remaining after the deduction from those earnings of any amounts required by law to be withheld.” These mandatory deductions include federal, state and local income taxes; Social Security taxes; unemployment insurance; workers’ compensation insurance; state employee retirement deductions; and other deductions determined by federal and state law. Mandatory deductions do not include voluntary payroll deductions such as contributions for 401(k) plans, flexible spending accounts, charitable organizations, etc.
Question 2: I am in Arizona and I have an employee whom we gave him a loan to help pay a utility bill. This employee has now voluntary quit and still owes us some money. Can I withhold his last check and apply it to his loan that he has with us?
Under Arizona law, an employer may deduct amounts from an employee’s wages only in the following instances (AZ Rev. Stat. Sec. 23-352):
- The employer is required or permitted to do so by state or federal law or by court order. Examples of lawful deductions include Federal Insurance Contributions Act (FICA) taxes, state and federal income taxes, and wages that are assigned or garnished pursuant to a court order.
- The employee issues a prior written authorization for the deduction. Examples include deductions for insurance premiums and 401(k) contributions.
An employer may not withhold wages under a written authorization from the employee past the date specified by the employee in a written revocation of the authorization, unless the withholding is to resolve a debt or obligation to the employer or a court orders otherwise.
- There is a reasonable good-faith dispute over the amount of wages due, including the amount of any claim or counterclaim of debt, reimbursement, recoupment, or set off by the employer against the employee.
- The employer is required to do so by court order for the payment of child support, alimony, or other debts.
Even if you have a written agreement, you should be extremely cautious in making a deduction, as employees may recover triple the amount of any wages withheld without proper authorization in a legal action against the employer (AZ Rev. Stat. Sec. 23-355).
If you don’t have a valid written agreement, your rights in such a situation are similar to those of other creditors. You could file a civil suit to collect the money owed or simply write off the debt.