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Payroll & Taxes

Making Deductions from Employee Pay

Christine Batten, PHR
by Christine Batten, PHR on December 17, 2013


wagesIn the previous blog posts in my wage and hour fundamentals series, I talked about exempt vs. non-exempt employees, how you can accurately determine hours worked for employees and calculating drive and travel time compensation. Now let’s talk about making proper deductions from employee pay.

Wage and hour laws are developed to protect the wages which employees earn for work performed. Therefore, there are additional laws which dictate under what circumstances employers can deduct from those wages. This will discuss federal guidelines so keep in mind many states have more restrictive laws concerning deductions from wages.

For both exempt and non-exempt employees, permissible deductions typically include those required by law (i.e. taxes), or by court order (i.e. garnishments) and those at the request and for the benefit of the employee (i.e. benefits premiums, 401(k) deposits).

Deductions from Exempt Employees

Generally, other than the deduction mentioned above, employers may not deduct from an exempt employee’s pay – with a few exceptions. An exempt employee can legally have their pay docked in the following circumstances ONLY:

  1. It is the first or last week of employment and the employee does not work the entire week.

  2. An employee is absent from work for reasons attributable to FMLA.

  3. The employer offers a reasonable number of paid sick days; the employee has either already used all the paid sick days available to them or have not yet become eligible for them; and the employee calls in sick. If you do not have a paid sick leave plan, you may not deduct the day if the employee has worked any day that week.

  4. You take a full day off for personal reasons (regardless of whether you have vacation or other paid leave available or not).

  5. You were suspended for a major safety violation.

  6. You were suspended for the violation of a written company policy which applies to all employees and which relates to workplace conduct (workplace violence, sexual harassment, drugs/alcohol on company property, etc.).

The ONLY instance in which an exempt employee can ever have pay docked in partial day increments is for #2. If an employee misses part of a day for a reason attributable to FMLA, you only have to pay them for the part of the day they actually worked. In ALL other circumstances, if an employee works any part of the day, they must be paid for the whole day.

Employers CAN require that employees use vacation, sick or personal time to cover partial day absences (in all states except California, and even sometimes in California). For example if someone has a doctor's appointment and is three hours late, or if they leave an hour early to renew their driver’s license, while they have to be paid for the entire day, it can be 5 (or 7, or however many) hours wages plus 3 (or 1, or whatever) hours vacation. The employee has still received their full salary, and that's all the DOL cares about. See Appendix A below on Exempt Status Pay Reductions - Sickness vs. Personal Reasons.

APPENDIX A - Exempt Status Pay Reductions - Sickness vs. Personal Reasons

If a position is determined to meet the criteria for exemption, and the employer chooses to make the position exempt, deductions from pay for sickness/disability or personal reasons may only be made using the following as a guideline:

Employers With a Bona Fide Leave Plan

FLSA Status Absence Reason Absence Period Result
Exempt Sickness or Disability Partial Day Can be forced to use leave time. If leave is exhausted or has not become effective yet, no reduction in pay is allowed; however, the leave balance may be reduced to the negative.
Exempt Sickness or Disability Full Day Can be forced to use leave time. If leave is exhausted or has not become effective yet, a full day reduction in pay is allowed (an employer may pay leave time where the balance is zero thereby reducing the leave balance to the negative).
Exempt Personal Partial Day Can be forced to use leave time. If leave is exhausted or has not become effective yet, no reduction in pay is allowed; however, the leave balance may be reduced to the negative.
Exempt Personal Full Day Can be forced to use leave time. If leave is exhausted or has not become effective yet, a full day reduction in pay is allowed (an employer may pay leave time where the balance is zero thereby reducing the leave balance to the negative).

Employers Without a Bona Fide Leave Plan

FLSA Status Absence Reason Absence Period Result
Exempt Sickness or Disability Partial Day No reduction in pay is allowed.
Exempt Sickness or Disability Full Day No reduction in pay is allowed unless the full workweek is not worked
Exempt Personal Partial Day No reduction in pay is allowed.
Exempt Personal Full Day Reduction in pay is allowed.

 

[1] A plan that has defined sick leave benefits which have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide. In addition, to be bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.

A plan that has defined sick leave benefits which have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide. In addition, to be bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.

Deductions from Non-Exempt Employees

With the exception of permissible deductions previously referenced, deductions from a non-exempt employee’s pay cannot take their wages below minimum wage – not even if they sign a document authorizing such a deduction. Employees may not sign away their rights under the law. As such, if an employee only makes minimum wage, NO deductions can be taken.

Deductions for items like uniforms, tools, property damage or other items for which employers may charge employees are considered for the convenience of the employer and therefore cannot take the employee’s pay below minimum wage. Additionally, all such deductions must be authorized in writing by the employee prior to an employer taking such deductions. Not all states require this but it is a good practice to follow. Many states have stricter laws regarding deductions.

Suggestions:

(A) If you have larger deductions that might take an employee’s pay below minimum if taken out at one time, you can arrange for smaller, periodic deductions to remain in compliance with the minimum wage requirements and still receive the funds. For example, an employee lost a tool valued at $100; you could deduct $25 per pay over 4 pay periods.

(B) If you know in advance particular amounts which may be required at a later date (but that are difficult to deduct if an employee terminates and their final pay isn’t enough, you may take deductions as a “deposit” (again, periodically in smaller increments) and then determine whether to keep it or return it upon termination. For example, certain employees use a company laptop worth $500. You might make deductions of $50 out of the first 10 paychecks. Upon termination when the employee returns the laptop, you refund the deposit. If they do not return it, you already have collected for the amount of the property and will not have to chase after them for it.

(C) While we strongly advise against loans or advances in pay, we recommend you consult with one of our HR specialists prior to doing so.

(D) ALL instances that may necessitate deductions from pay should be in writing – policies, procedures, acknowledgements of receipt of property, agreement to repay, authorization for deductions, etc.

(E) Any time you are considering deducting from an employee’s pay, consult with one of our HR specialists to determine what is permissible and the best practice for making the deduction(s).

If you have specific questions on making deductions from employee pay or are interested in ways that FrankCrum can help you with HR and wages and hours issues you’re currently facing, please contact us. We’re here for you! Don’t forget to check back soon for our final post in this series on pay calculations and overtime.

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Christine Batten, PHR
ABOUT THE AUTHOR
Christine Batten, PHR

Christine has over 20 years of HR related experience with a background in labor and employment law.