Final pay in California: Beware of improper deductions

Inappropriate deductions from final pay can get California employers in trouble. Whether an employee quits unexpectedly or departs after a well-planned termination process, the clock is ticking on the delivery of the person’s final pay, which forces employers to act quickly and can unfortunately prompt mistakes made in haste. Getting the final paycheck delivered on time is important, but it’s equally important to ensure that all required items are included and no improper deductions are taken.

“This one can get really sticky in California. We not only have some of the most restrictive rules in the country, but we also have some written rules that are contradictory to each other. And to add insult to injury, we disallow some deductions from final pay that are otherwise okay to take while the person is still employed. You can end up here with some counter-intuitive obligations that can lead to very costly mistakes.” Barrie Gross explained in a recent CER webinar.

The law reflects the strong public policy favoring the protection of employees’ wages. As such, employers are prohibited from deducting amounts from an employee’s wages, even as a set-off for amounts clearly owed by the employee. In other words, employers cannot withhold wages to ensure performance of an obligation, even for repayment of loan, or for return of company equipment. These types of obligations must be pursued separately to the final paycheck.

Final Pay in California: What Can Be Deducted?

Employers may lawfully withhold amounts from wages (including final pay):

• When required or empowered to do so by state or federal law, such as taxes or wage garnishments
• When a deduction is expressly authorized in writing by the employee to cover things like insurance premiums or benefit plan contributions
• When a deduction to cover health, welfare or pension contributions is expressly authorized by a wage or collective bargaining agreement

Final Pay in California: Best Practices for Deductions

How can an employer meet their obligations while balancing the need to be repaid for any debts owed? Here are some examples of best practices for final pay deductions:

• Take only the usual or ordinary deductions for taxes, insurance, 401(k), etc. In other words, there should be no deductions for anything that’s not a direct benefit to the employee.
• Be careful when considering deducting for costs caused by the employee, such as cash shortages, breakage, and loss of equipment. Gross explained: “If it’s caused by an employee’s simple negligence, that’s considered to be the cost of doing business and it’s the employer’s loss—no deduction. But, if it’s from employee theft or gross negligence, some of the wage orders do allow pay deductions even without a written agreement. Here’s the problem if you follow the wage orders on this one: the wage orders are contrary to the labor code.” As such, the best practice, absent solid proof of gross negligence, is to not deduct for cash shortages, breakage or loss of equipment. Even with proof, it’s still risky.
• Get agreements for final pay deductions re-confirmed. Even if pay or vacation advances, for example, are already reflected in signed agreements with the employee permitting installment deductions, ask the employee to sign a new agreement at termination allowing the deduction from final pay. This final pay deduction must be voluntary, and even then it’s still risky for the employer.
• Don’t make employee loans. But if you do, always use promissory notes and don’t deduct more than the currently due installment from final pay.
• Don’t withhold any pay until the terminating employee performs a particular act, such as returning a company owned computer or cell phone. This is specifically prohibited.
• Make sure the employee still receives at least minimum wage after all deductions have been made.

Even when following these guidelines, always check with legal counsel before deducting anything from final pay other than normal deductions and withholdings.

The above information is excerpted from the webinar “Final Pay in California: 7 Common and Costly Mistakes You Could Be Making Right Now.” To register for a future webinar, visit CER webinars.

Barrie Gross is the founder of Barrie Gross Consulting, a human resources consulting and training firm dedicated to the ongoing management and development of human capital. Ms. Gross is a recognized expert in HR and talent management strategies.