Payroll Deduction Laws and Employer Best Practices

Posted by bop-admin on Apr 26, 2016 11:56:55 PM

Payroll Deductions Can Be a Legal Landmine!

Federal and state laws place restrictions on employers making deductions to their employees’ pay.  A recent California court case (Davis v. Farmers Insurance Exchange, 2016) highlights the potential liability employers can face if they don’t follow state and federal specific guidelines.


In this case, Davis was misclassified as an Independent Contractor and therefore was found to be entitled to the benefit of wage laws requirements.  Some of the requirements Farmers was found to have violated included

1) the employer’s obligation to promptly pay all wages due and

2) errors in deductions from the employees’ wages.

Farmers was prohibited from deducting unauthorized expenses from the employees’ wages, deducting from debts due the employer, or recouping advances absent the parties’ express agreement.


Here are some common payroll deduction errors:

  • Giving a loan to an employee and allowing them to pay you back through payroll deductions.
  • If an employee breaks an expensive piece of equipment recouping the expense by charging them for it through payroll deductions.
  • Deducting advanced commissions from a sales representative without having a written and signed commission agreement in place.
  • Misclassifying an employee as an Independent Contractor and making deductions from their pay for business expenses.
  • Ending the employment relationship prior to the employee paying the employer back for a loan, so the remaining balance is deducted from their final pay.
  • Employees quiting prior to earning back used vacation time that caused their vacation pay balance to be negative, so the remaining balance is deducted that from their final pay.
  • Charging an employee for uniforms through a payroll deduction, which causes their wages to dip below the minimum wage.


Authorized payroll deductions vary for most states.  SHRM has a great article that discusses federal and state laws governing the payment of wages and hours worked. Specifically, it addresses the scope of and compliance requirements under the federal Fair Labor Standards Act So, what is the best course of action for employers to take?


Wage Deduction Best Practices

  • Limit all deductions from wages to include only those that are required by law.  For example, only deduct garnishments, taxes and insurance premiums for health, dental and other employee benefit  plans.
  • Be sure to have the employee provide an explicit signed authorization prior to taking any benefit deductions.
  • Don’t pass on any business expenses to employees. Reimburse employees for all company expenses they incur while performing their work duties.
  • Don’t use deductions from wages as a self-help remedy, even if the money is owed by the employee.
  • If you loan an employee money, do not take repayment as a deduction from their paycheck.  Have the employee sign a promissory note and write a personal check to pay the money back.
  • Do not make any wage deductions to recover loss or damage, as this is either outright illegal in many states and could still expose you to a wage and hour claims in states where it is allowed under narrow circumstances.
  • On a federal level, even with written authorization from an employee, don’t do any deductions, (besides for health benefits or 401k etc), that will bring the employee's wages below  the minimum wage, even with the employee’s signed consent.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances and evolving legislation and wage and hour laws in the jurisdictions where your organization operates.



Topics: HR Compliance, HR Tip