Deductions From Employee Paychecks – What Can And Cannot Be Taken Out

California has become a hotbed of wage and hour litigation and not a day goes by without a new claim being filed against an employer in either state or federal court. Many of claims are filed as class action lawsuits. Because of this reality employers have become increasingly aware of their obligations concerning payments for overtime, minimum wage and providing meal and rest periods. An area often overlooked, however, is employee wage deductions.

Every employer is cognizant, or at least they should be, of the standard wage deductions made to their employees’ paychecks. In fact, many employers use sophisticated software and payroll companies to assist them in preparing paychecks and making such deductions. They go to sleep at night feeling secure that they are in compliance with California’s wage and hour laws, but should they? While software and payroll companies help employers manage their payrolls in an efficient and cost effective manner, compliance with California’s wage and hour law is the ultimately the employer’s responsibility and not guaranteed by the use of software or even a payroll company. Knowing which deductions are prohibited by law, those that are automatically authorized by law and those which require an employee’s written authorization can protect an employer from becoming one of the countless defendants being sued across California every day.

Prohibited Deductions

Certain payroll deductions are specifically prohibited under the California Labor Code. Such unlawful deductions include business expenses, pre-employment medical or physical examinations, workers’ compensation costs, uniforms, bonds, photographs, gratuities earned by an employee and anything that could be deemed a rebate of wages.

Permitted Deductions

There are two basic types of deductions permitted by the California Labor Code; deductions authorized by law and deductions for the benefit of the employee. Deductions authorized by law include such standard deductions as state and federal income tax withholding, social security taxes and state disability insurance taxes. Also authorized by law are wage garnishments ordered by a state or federal court. Deductions for an employee’s benefit must be expressly authorized in writing by the employee. Common examples of these deductions are insurance premiums, hospital or medical dues and retirement contributions. Many employers and employees are familiar with the authorized deductions above. Less well known, but commonly practiced, are other deductions agreed upon by the employee and employer. The “agreement” may be express or simply an unspoken common understanding. Either way when not analyzed carefully and properly documented, such deduction may be illegal and give rise to an employee action for wrongful withholding of wages. What makes these deductions tricky is that some are approved by the Department of Labor Standards Enforcement (“DLSE”) but not by the California Labor Code and others are permissible to take from an employee’s regular paycheck but not from an employee’s final paycheck upon termination or resignation. Below are some of the common deductions employers should scrutinize carefully.

  • Purchases made by an employee from the employer. These can be purchases of goods from the “company store” or just about any situation employee is voluntarily purchasing something through the employer. The employer may deduct these purchases from the employee’s wages but the agreement must be in writing and the employer must keep accurate records of the purchases that correspond to the deductions.
  • Employee loans and other debts. Periodic payments in the form of wage deductions may be taken for debts owed to the employer if authorized by the employee in writing. Be careful though, because the payments cannot be accelerated upon the employee’s termination.
  • Business losses due to an employee’s negligence. Losses associated with an employee’s negligence are a cost of doing business that cannot be transferred to the employee. However, the DLSE takes the position that an employer may transfer the cost if it can be shown that the loss was caused by an employee’s dishonest or willful act or by the gross negligence of the employee. Employers should proceed very cautiously, however, if using this self-help approach because California courts have not endorsed the DLSE’s point of view and the DLSE will not support this type of deduction from an employee’s final paycheck.
  • Uniforms and tools. Section 9 of the Wage Orders specifies that the cost of uniforms and tools may be deducted from an employee’s final paycheck if not returned to the employer. However, California courts have not provided a definitive answer on this apparent conflict between the Labor Code and the Wage Orders, and it may not pass judicial scrutiny. Further, the DLSE takes a dim view of deductions from final paychecks.

Employers making wage deductions should take careful steps to analyze that all employee wage deductions comply with the law rather than relying on automated software or payroll companies that may not take into account the many nuances of California labor law or the employer’s particular justification for or documentation of a deduction. Remember, an ounce of prevention is worth a pound of cure and may just help you avoid costly litigation..