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NO TAKE BACKS

Employers’ Hands are Tied When Recouping Overpayments or Collecting on Loans

The payroll department discovers it accidentally overpaid an employee by $500. May it simply deduct that extra amount from the employee’s next pay check? After all, it’s the employer’s money and the employee never earned it.

Surprisingly, the answer is no, according to the California Division of Labor Standards Enforcement (DLSE), i.e. the Labor Commissioner’s office, which considers such deductions to be a form of unlawful “self-help.”

California Labor Code section 221 makes it unlawful to collect or receive from an employee any wages previously paid, even for accidental wage overpayments or overpayments of the employee’s medical premiums to an insurance company.

Similarly, California Labor Code section 300 prohibits an employer from collecting loan repayments out of an employee’s future paychecks. The only exception concerns loans made to cover an employee’s “necessities of life,” e.g. food or housing, but only if (i) the loan is in writing; (ii) the amount does not exceed the minimal amount needed for such necessities; (iii) the employee never receives less than minimum wage in any future paychecks; and (iv) no deductions are made from the final paycheck.

In light of these restrictions, an employee should simply reimburse the company separately for any accidental or inadvertent overpayments or for any personal loans made throughout the course of employment. The parties should also adequately document the reason for any such employee-to-employer repayment. Whenever loaning money to an employee, management should also have him or her sign a promissory note that specifies exact repayment terms.

Thus, California employer best practices are to avoid deducting any overpayments or loan reimbursements from future paychecks and never deduct for repayment from the employee’s final paycheck, even with the employee’s written authorization and even if the deductions do not lower the amount paid below minimum wage.

See also: Wage Deductions (August, 2016).

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

Cindy Bamforth

June 14, 2018