It is likely that your number one (or two) expense is labor. Not only is this likely your largest expense, but it is also one of the most complicated and/or confusing tasks that need to be done. One question that frequently comes up regards what is or is not allowed to be deducted from employees’ pay. Today we will try to clear the air and make sense of this cloudy topic.
To begin with, it’s worth noting that many employers routinely deduct from employees’ wages such things as lost or damaged tools. While there is nothing inherently wrong with these deductions it is important to note that these deductions must be done correctly in order to avoid violating federal and/or state wage-hour laws. Violating such laws can result in costly assessments and/or penalties.
Below are some items that can be made deducted without restriction:
- Taxes
- Garnishments for items such as child support, alimony, creditors, etc. It is important to note that limits under the federal Consumer Credit Protection Act and similar state laws may apply.
- Merchandise voluntarily purchased by the employee.
- Principal portions of loans. However, deductions for interest amounts cannot result in the company violating federal and/or state minimum wage and overtime laws (see the section on Restricted Deductions below for more information on this topic).
- Reasonable cost of room and board that are provided for the employee’s benefit not the employer’s.
- Deductions for benefits that employees request such as medical insurance premiums, dependent care assistance, and retirement plan contribution to things like a 401(k).
- Deductions requested by employees that are not payable to the employee (i.e. union dues, US Saving bonds, etc.)
Salary advances and over-payment
As a general rule, the DOL’s Wage-Hour Division does not limit deductions for salary advances or over-payment. However, it is critical that employers have documentation supporting salary advances or over-payment.
Many state agencies may disallow or severely limit deductions for advances and over-payments even if documentation is available. Given this fact, when in doubt an employer should always consult the state WHD office in the state where the work was performed.
Prohibited Deductions
- Items that can never be deducted from employees’ wages include:
- Employer payroll taxes such as FUTA
- Cost for bonding an employee
- Service charges for making wage assignments under a court order or contract. However, as was noted above, involuntary wage garnishments (such as for child support) may have the service fees deducted to the extent permitted under state law.
Restricted Deductions
This category includes involuntary wage deductions for such things as:
- Lost or damaged tools
- Room and board that are provided for the employer’s benefit
- Cash shortages
- Uniforms and/or uniform cleaning if wearing the uniform is required
- Interest owed on an employer’s loan to an employee
- Involuntary deductions for disciplinary docking of pay.
To a large extent the determination as to whether or not a restricted deduction is allowed is based on whether the employee is exempt or non-exempt from overtime pay.
Exempt Employees
Employers cannot take restricted deductions from the wages of exempt employees. The employee may lose their exempt status if this restriction is violated.
For example, if a position requires a particular uniform the cost cannot be deducted from the employee’s pay. If it is the employee loses their exempt status and must be paid overtime for any hours worked over 40 in the workweek.
One workaround is to deduct wages that are above the employee’s base salary such as bonuses or commissions. These deductions do not threaten the employee’s exempt status. That being said it is important that such deductions can be taken only if they do not violate an employment contract or a labor-management agreement.
Employers can suspend an exempt employee without pay for disciplinary reasons provided that the suspension is for at least a week. If the suspension is less than one week (ex: two days) the employee becomes non-exempt and must be paid for overtime. The one exception to this rule is a violation of a major safety rule.
Non-Exempt Employees
The rules regarding restricted deductions for non-exempt employees are a little more liberal and come with the following caveats:
The deduction cannot result in the employee’s being paid less than federal and/or state minimum wage requirements.
Deductions cannot be taken in the same week that the employee worked overtime. Wait for a week when the employee worked 40 or fewer hours.
There is a way to get away from these restrictions. Federal law does not require paid leave (i.e. holidays, vacations, sick days, etc.) or severance pay. Employers can therefore take restricted deductions from such payments without limitation. However, state wage-hour laws may prohibit such deductions. It is a good idea to always double-check.
One last warning concerns how to protect your business from violating applicable laws. You should always have employees sign a written authorization before making the deduction, even if they are deductions that can be made without restrictions. Many states (such as Texas and New York) require written consent before deductions may be made.
As we tried to make clear in this post, taking deductions can be a risky proposition given all the rules concerning it. I would never recommend taking a deduction if you are not sure of its legality. Always check with professionals, such as a lawyer or a CPA, to make sure what you are doing is legal. Failure to do so could end up costing your business penalties and fees, something no business owner wants!
Information taken from Salam, Debera J. “What Employers Can- and Cannot- Deduct From Employees’ Pay” as reprinted in The General Ledger, Vol. 31 No. 9, September 2014.