It depends on the amount you are trying to recover and how you go about recovering those funds. This issue often comes up because an employee negligently damaged company property or failed to return company property at the end of their employment. An employer may want to cut its losses by deducting the amounts “owed” through a payroll deduction, but such a practice implicates the Fair Labor Standards Act (“FLSA”) and state wage deduction laws.
FLSA
Under the FLSA, a non-exempt employee must be paid at least the minimum wage and be paid overtime for all hours worked over 40 in a workweek. There are no exceptions to this rule. The FLSA also allows employers to deduct the value of lost, damaged, or unreturned property from an employee’s wages. That means for an employee paid at the minimum wage, you can never deduct for lost, damaged, or unreturned property because the deduction would bring the employee’s pay below the minimum wage.
What if an employee is paid slightly above the minimum wage and also worked a significant amount of overtime in the workweek? You cannot deduct from the overtime pay, leaving you only able to deduct from straight-time pay. If the amount of straight-time pay above the minimum wage is less than the deduction you want to make, then you are prohibited from making that deduction. For example, let’s say an employee did not return his $35 uniform. The employee’s straight-time pay that was above the minimum wage for the workweek was $30. You cannot deduct the full $35 value of the uniform. You could, however, deduct $30 because the employee would then be paid exactly the minimum wage.
Keep in mind that the minimum wage and overtime rule may hamper your ability to uniformly deduct from all employees’ pay, potentially exposing you to unnecessary or frivolous discrimination claims. If you deduct from Employee A’s pay because he makes above the minimum wage, but do not deduction from Employee B’s pay because she makes exactly the minimum wage, Employee A may be disgruntled enough to file a gender discrimination claim. Was the $30 deduction worth the thousands of dollars you had to spend dismissing a frivolous discrimination claim?
State Wage Deductions Law
Even if the FLSA lets you deduct for lost, damaged, or unreturned property, your state’s wage deduction law may say otherwise. Currently, Arkansas, California, Delaware, Hawaii, Illinois, Kansas, Minnesota, New York, and Ohio strictly prohibit employers from taking any wage deduction to recoup the value of lost, damaged, or unreturned property. Are you writing a deduction policy now because you do not operate in one of these states? Not so fast: many other states place restrictions on employers’ ability to deduct for lost, damaged, or unreturned property. For example, Alaska only allows an employer to deduct if the employee admits responsibility in writing. And Wisconsin law only allows an employer to deduct if (1) the employee gives written authorization; (2) the employer and a representative designated by the employee both agree that the damage or loss was caused by the employee’s negligent or intentional conduct; or (3) a court found the employee liable for negligence, carelessness, or willful and intentional conduct. That means if your employee damages your company-provided vehicle and none of the three requirements are met, you cannot recoup the costs even if the insurance company finds your employee negligent.
Bottom line: if you want to adopt a deduction policy, contact an employment attorney to walk through the pros and cons applicable to your state.
