Benefits and Compensation

The Ins and Outs of Deductions From Pay

The federal law on deductions from pay contains few restrictions when compared to the laws in many states. Under the Fair Labor Standards Act (FLSA), almost any deduction is permitted, even, in some cases, if it reduces the employee’s pay below the minimum wage. Certain deductions may specifically reduce pay below the out

However, there are a number of deductions that may not be made if they result in pay that is less than the minimum wage. These rules apply only to nonexempt employees who are covered by minimum wage requirements. Below we have discussed some of the main points on deductions from pay.

Deductions That May Drop Wages Below Minimum Age

An employer may deduct the reasonable cost of providing the following items even if the employee’s cash wage drops below the minimum wage:

  • Federal, state, and local taxes. The required withholdings for federal, state, and local taxes, including Federal Insurance Contributions Act (FICA) taxes, may reduce wages below the minimum wage. However, an employer may not deduct from the employee’s wages taxes that the employer is required to pay.
  • Fair value of meals, living quarters, or other facilities. The reasonable cost or fair value of meals, living quarters, or other facilities may be credited as part of the minimum wage. “Fair value” is not retail value; it may not include any profit to the employer or its associates. The employees must be told that these amounts are being deducted from their wages, and they must voluntarily accept the deductions. The facilities must be for the benefit of the employees. If they are for the employer’s benefit, they may not be credited against the minimum wage. For example, if an employer gives employees supper money because it needs them to work overtime, that supper money may not be credited against the minimum wage.
  • Transportation. Transportation provided by the employer may be credited against the minimum wage, but only if the travel time does not count as time worked and is not necessary to the employer.
  • Fuel and merchandise connected to board and lodging. Fuel for residential heating and cooking and general merchandise provided by company stores may be credited against the minimum wage, but only if they are reasonably connected to board or lodging.
  • Tuition. Tuition furnished by a college to its student employees may be credited against the minimum wage.
  • Deductions that benefit the employee. Deductions that benefit the employee includes deductions for life insurance, health insurance, pension, and welfare plans; contributions to charity; and the purchase price of U.S. Savings Bonds. These deductions may cut into the minimum wage if the employee freely assents and if the employer derives no profit or benefit from the deductions.
  • Loans. Where an employer makes a loan or an advance of wages to an employee, the principal may be deducted from the employee’s earnings even if such deduction cuts into the minimum wage or overtime pay due the employee under the FLSA. An employer may not, however, make an assessment for administrative costs or charge any interest payment that brings the employee below the minimum wage.

Benefit or Convenience of the Employer

According to the federal Department of Labor (DOL), the FLSA does not allow uniforms, or other items which are considered to be primarily for the benefit or convenience of the employer, to be included as wages. Thus, an employer may not take credit for such items in meeting its obligations toward paying the minimum wage.

Some examples of items which would be considered to be for the benefit or convenience of the employer are tools used in the employee’s work, damages to the employer’s property by the employee or any other individuals, financial losses due to clients/customers not paying bills, and theft of the employer’s property by the employee or other individuals. Employees may not be required to pay for any of the cost of such items if, by so doing, their wages would be reduced below the required minimum wage.

This is true even if an economic loss suffered by the employer is due to the employee’s negligence. Employers may not avoid minimum wage and requirements by having the employee reimburse the employer in cash for the cost of such items in lieu of deducting the cost from the employee’s wages.

The following items may be deducted from pay, but the resulting wage must be at least the federal minimum wage:

  • Cash shortages. Employers have a limited right to recover cash shortages from cashiers and other employees who handle money. Employees should be notified in a written agreement signed by both the employee and the employer that such deductions may be made.
  • Company car. Employers may deduct the cost of personal use of a company car, but only if the employer does not benefit from such use.
  • Tools. Employers may deduct the cost of providing the “tools of the trade” and other material necessary for carrying out the employer’s business as long as the deduction does not reduce the employee’s pay below the minimum wage.
  • Uniforms. According to the federal DOL, the FLSA does not require that employees wear uniforms. However, if the wearing of a uniform is required by some other law, the nature of a business, or by an employer, the cost and maintenance of the uniform is considered to be a business expense of the employer. If the employer requires the employee to bear the cost, it may not reduce the employee’s wage below the minimum wage. A DOL opinion letter has stated that an employer may not use an employee’s tips to cover the cost of uniform laundering.

Finally, keep in mind that many states regulate wage deductions much more strictly than does the federal government. Accordingly, the rule that is most advantageous to the employee will control.

Susan PrinceSusan E. Prince, J.D., M.S.L., is a Legal Editor for BLR’s human resources and employment law publications. Ms. Prince has over 15 years of experience as an attorney and writer in the field of human resources and has published numerous articles on a variety of human resources and employment topics, including compensation, benefits, workers’ compensation, discrimination, work/life issues, termination, and military leave. Ms. Prince also served as an expert on several audio conferences discussing the 2004 changes to the federal regulations under the Fair Labor Standards Act. Before starting her career in publishing, Ms. Prince practiced law for several years in the insurance industry and served as president of a retail sales business. Ms. Prince received her law degree from Vermont Law School.

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