When California Employers May Subtract from Earned Compensation

Employers sometimes wish to make deductions from an employee’s wages for a variety of reasons.  Doing so without knowing what the law permits can be a mistake, as California has stringent laws on what deductions are allowed.

As a general principle, employers may make deductions from wages if: (1) state or federal law requires or permits the deduction; (2) an employee authorizes the deduction in writing for such things as hospital or medical dues, insurance premiums, or other deductions that do not reduce a standard wage resulting from collective bargaining, a wage agreement, or a statute; or (3) a collective bargaining agreement expressly authorizes health, welfare, or pension plan contributions.  CA Labor Code 224.

Unlawful Deductions

           An employer may not:

• Collect back any part of a wage that it has previously paid to an employee. For example, if you advance commissions to employees, you may not take them back if the customer never pays unless you have a policy that correctly and legally characterizes the commissions and advances and provides when and how you may recoup them.  See, Drafting Sound Commissions Agreements; and Defining Employee Commissions.

• Collect a debt the employee owes the company against wages without written agreement from the employee. Labor Code 224.  A company also may never offset the balance of a debt owed against final wages.   Barnhill v. Robert Saunders & Co.  So if you loan money to an employee who later quits, you cannot subtract the remaining debt from the person’s last wages.  You could work out an agreement with the person on how (s)he will pay off the debt and you can use normal collection and litigation remedies if needed.

• Make payroll deductions or require an employee to pay for any “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer.” Labor Code 2802.  These expenditures include such things as uniforms, required medical examinations, travel, meals, and purchases of equipment.

• Subtract from wages the amount of tips an employee has earned. Labor Code 351.

• Deduct the amount of a bond that the employer paid for an employee or a photograph the employer required. Labor Code 401 

• Subtract from wages expenses resulting from the employee’s negligence, such as cash shortages, loss of equipment, or breakage. See, Industrial Welfare Commission (IWC) Wage Orders, including, for example, section 8 of Wage Order 4. This rule does permit an employer to make deductions for gross negligence or dishonest or willful acts. See below.

Lawful Deductions

An employer may:

• Deduct legally required amounts for such things as federal and state income tax, unemployment, state disability insurance and paid family leave tax, Medicare, and Social Security.

• Subtract amounts under court orders for garnishment or child support up to certain statutory maximum amounts.

• In industries where an employer may need to furnish meals or lodging, deduct up to the value of those items specified in applicable IWC Wage Orders. See, for example, section 10 of Wage Order 15.

• Make deductions authorized by an employee in writing for such things as a 401(k) account, life insurance, health insurance, or union dues. Labor Code 224.

• Deduct other amounts that the employee agrees to in writing, such as payments on a loan the employer gave to the employee so long as it is not the last pay check, does not reduce the wages to below the amount required by a wage agreement, collective bargaining agreement, or statute, and is not more than agreed upon by the employee.

• Subtract amounts attributable to an employee’s gross negligence or dishonest or willful acts. See, for example, section 8 of Wage Order 4.

Before you make deductions from wages other than required withholding, it is advisable to verify that the intended deduction is legally permissible.

For further assistance, please contact one of our attorneys: Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

August 26, 2016