by Jennifer Grady, Esq.
It’s only a matter of time before an employee damages equipment or company property, or discovers cash is missing from the register. But is it legal to deduct wages from an employee’s paycheck in California to pay for the damage?
Well, it depends.
Wages can only be garnished in limited, enumerated circumstances, and doing so otherwise is not without risk to the employer. The state of California Legislature and courts consider these issues to be the “cost of doing business”. Read on to find out what remedies are available to California employers when an employee causes damage to the company.
1. When Can an Employer Withhold Wages?
First, an employer can lawfully withhold amounts from an employee's wages only:
(1) when required or empowered to do so by state or federal law; or
(2) when a deduction is expressly authorized in writing by the employee to cover insurance premiums, benefit plan contributions or other deductions not amounting to a rebate on the employee's wages; or
(3) when a deduction to cover health, welfare, or pension contributions is expressly authorized by a wage or collective bargaining agreement. (Labor Code Sections 221 and 224.)
2. What about a cash shortage, breakage, or loss of equipment?
An employer’s ability to deduct amounts from an employee's wages due to a cash shortage, breakage, or loss of equipment is specifically regulated by the Industrial Welfare Commission Orders, and limited by court decisions. (Kerr's Catering v. Department of Industrial Relations (1962) 57 Cal.2d 319). In addition, there have been several court decisions that significantly restrict an employer's ability to take an offset against an employee's wages.
An employer cannot legally make such a deduction from wages if the employee’s error was by mistake or accident, a cash shortage, breakage, or loss of company property/equipment. The California courts have held that losses occurring without any fault on the part of the employee or that are merely the result of simple negligence are inevitable in almost any business operation, and thus, the employer must bear such losses as a cost of doing business. For example, if an employee accidentally drops a tray of dishes, takes a bad check, or allows a customer to walk out without paying a check, the employer cannot deduct the loss from the employee’s paycheck. There is an exception to the foregoing contained in the Industrial Welfare Commission Wage Orders that purports to provide the employer the right to deduct from an employee's wages for any cash shortage, breakage or loss of equipment if the employer can show that the shortage, breakage or loss is caused by a dishonest or willful act, or by the employee's gross negligence.
This means is that a deduction may be legal if the employer proves that the loss resulted from the employee's dishonesty, willfulness, or grossly negligent act. Under this regulation, a simple accusation does not give the employer the right to make the deduction. The DLSE has cautioned that use of this deduction contained in the IWC regulations may, in fact, not comply with the provisions of the California Labor Code and various California Court decisions. Furthermore, DLSE does not automatically assume that an employee was dishonest, acted willfully, or was grossly negligent when an employer asserts such as a justification for making a deduction from an employee's wages to cover a shortage, breakage, or loss to property or equipment. Therefore, the employer will be taking a risk to make these deductions without a thorough investigation.
Labor Code Section 224 clearly prohibits any deduction from an employee's wages which is not either authorized by the employee in writing or permitted by law, and any employer who resorts to self-help does so at its own risk. An objective test is applied to determine whether the loss was due to dishonesty, willfulness, or a grossly negligent act.
If an employer makes such a deduction and it is later determined that the employee was not guilty of a dishonest or willful act, or grossly negligent, the employee would be entitled to recover the amount of the wages withheld. Additionally, if he employee no longer works for the employer who made the deduction, and it is determined that the deduction was wrongful, the employee may also be able to recover the waiting time penalty pursuant to Labor Code Section 203.
3. What’s an Employer to Do?
Cash Shortage: If there are shortages in a cash drawer, the employee can be disciplined, up to and including termination. Additionally, the employer can bring a legal action in court to recover the damages suffered.
Withholding of Balance of Loan Agreement. Although a California court has held that deductions for the periodic installment payments on a loan made to an employee by the employer are permissible when authorized in writing by the employee, the court also concluded that the balloon (lump sum) payment of the outstanding balance to be made at the time the employment relationship ends is not allowed, notwithstanding the fact the employee has given his or her written consent to such a payment.
When the employment relationship ends, an employer can only deduct the amount of one installment payment from the employee’s final paycheck. Employers are therefore taking the risk that they will not be fully repaid any loan or cash advance provided to an employee.
Deduction for Tardiness. An employer can deduct money from an employee’s paycheck for arriving to work late. The deduction shall not, however, exceed the proportionate wage that would have been earned during the time actually lost. However, for a loss of time less than 30 minutes, a half hour's wage may be deducted. Labor Code Section 2928.
For example, if you earn $12.00 per hour and come to work 40 minutes late, your employer can deduct $8.00 from your paycheck. If you come to work five minutes late, your employer can deduct $6.00.
4. Employee’s Remedies for Illegal Deductions.
If an employer makes an illegal deduction from a paycheck, the employee can either file a wage claim with the Division of Labor Standards Enforcement (the Labor Commissioner's Office), or file a lawsuit in court against the employer to recover the lost wages. Additionally, if the employee no longer works for the employer, he or she can make a claim for the waiting time penalty pursuant to Labor Code Section 203.
Likely, a lawsuit will include attorney’s fees for the employee, and a plaintiff’s attorney will find other wage and hour issues to tack on to the claims in the lawsuit. In this way, a small amount can balloon to damages, penalties, and attorney’s fees in the employee’s favor.
5. Conclusion
As there are very specific rules as to when an employer can deduct wages from an employee’s paycheck, it’s best to follow these rules set by the California Labor Code. Otherwise, if an employer erroneously deducts wages from an employee’s paycheck, the aggrieved employee may be entitled to bring a wage claim or lawsuit against the employer, which will ultimately cost much more in time and money to the employer than the original loss would have cost.
Alternatively, as a preventative method, an employer should consider training employees, creating policies and procedures manuals, using security cameras (with express written consent by the employees), enforcing policies in the Employee Handbook, and holding Performance Reviews. It’s best to seek qualified employment law counsel when considering a response to any of the issues raised in this article.
The Grady Firm’s employment law attorneys can assist with evaluating the risk to employers in deducting wages from an employee’s paycheck, and can assist in preparing documentation and recommending a course of action. Book a complimentary consultation on our website, or call (949) 940-6725 to book your free call today.
The information in this article is for illustrative purposes only, and should not be considered legal advice. Consult with an attorney who is licensed and in good standing with the California bar for any employment law concerns.
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