Are you confused about what deductions can be taken out of an employee’s paycheck? Well, you are not alone! The Wage and Hour Division (WHD) of the Department of Labor completed 33,295 compliance actions and collected more than $224 million in back wages for more than 275,000 workers during the 2011 Fiscal Year (http://www.dol.gov/dol/budget/2013/bib.htm#whd). The WHD serves as the governing agency for Federal laws pertaining to minimum wage, overtime pay, recordkeeping and prevailing wages for government service and construction. The WHD provides a general overview of permissible wage deductions, but most wage deduction requirements are dictated and outlined within State laws.
Under the Fair Labor Standards Act (FLSA), permissible deductions from minimum wage include wage meals, lodging and similar facilities, tax withholdings, court-ordered payments, and voluntary deductions/payments to assignees. Specifically, these wage deductions are among the most common deductions that can legally decrease an employee’s wages below the federal or state applicable minimum wage.
Meals, Lodging and Other Facilities
Employers can deduct the reasonable cost of providing meals, lodging, and similar facilities. Only the reasonable cost of these items can be deducted – not any amount attributable to an employer’s profit.
Employers are permitted to deduct taxes from an employee’s wages. These deductions are permitted for the employee’s share of Social Security taxes, as well as other federal, state and local taxes.
The FLSA does not restrict court-ordered garnishments as long as neither the employer nor any person acting on its behalf derives any benefit from the transaction. However, federal and state garnishment laws can set limits on the amount of wages that can be garnished.
Voluntary Deductions/Payments to Assignees
An employer can deduct amounts the employee directs the employer to pay to third parties, including deductions for: U.S. savings bonds, union dues, employee accounts with merchants, charitable contributions and employee benefit plan premiums or contributions. However, these deductions are permitted only if the employee has voluntarily assigned such amounts to the third-party, and neither the employer nor any person acting on the employer’s behalf derives any profit from the transaction.
There are many other common and permissible deductions that are allowed as long as the employee’s wages do not fall below federal or state applicable minimum wage. It is important to stress that many of these deduction requirements are regulated by the state. For example, many retail employers look for ways to recover cash register shortages from their sales clerks. Many state wage payment laws, however, forbid deductions for this purpose. Listed below are common deductions employers take from employee wages:
- Items Considered to Primarily Benefit or Convenience the Employer
Items such as uniforms, tools, damages to the employer’s property, financial losses due to customers not paying bills and theft of the employer’s property by the employee or other individuals.
The FLSA does not require that employees wear uniforms. However, if wearing a uniform is required for safety or is the nature of the business, the cost and maintenance of the uniform is considered to be a business expense of the employer. An employer may prorate deductions for the cost of the uniform over a period of paydays.
- Advances or Loans
According to the Department of Labor, if an employer makes a loan or advance of wages to an employee, the principal can be deducted from the employee’s earnings even if the deductions cuts into the minimum wage or overtime pay due to the employee. However, an employer cannot deduct for administrative costs or charge any interest if it brings the employee below minimum wage. Additionally, some states may have rules governing how and when an employer can collect from the employee.
- Wage Overpayments
Federal law does not prohibit employers from recouping wage overpayments. However, state laws should be reviewed prior to making these deductions as some states do not allow wage overpayments to be collected. It is considered an employer error that should not penalize the employee.
Requiring written authorization for deductions is common. Even if this is not mandated by federal or state laws, it is always an HR Best Practice to have an employee’s written authorization and documentation to make payroll deductions.