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October 07, 2010
Loans, Payroll Advances and Last Paychecks For Employees in Your Organization

Cheryl Orr and Heather Sager discuss loans, payroll advances and last paychecks in a BLR webinar entitled ‘Wage Payments: What You Can and Can’t Legally Deduct from Employees’ Pay’. They provide the following information about loans, payroll advances and last paychecks for employees.

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What can you deduct to cover the repayment of loans or payroll advances?

  • Principal vs. Interest: An employer can deduct both principal and interest from an employee’s pay if the employee provides consent regarding this arrangement.
  • Minimum wage: The deduction for the principal can bring the employee below minimum wage. However, the deductions for interest cannot bring the employee below minimum wage

If interest will be charged, the employer needs to ensure that the employee is aware of the interest and has agreed to it. It should also be in writing. Employers are advised to treat employees who take loans as a bank would treat them. The amount of the loan should be documented including the frequency of re-payment. The documentation should also contain information about what happens to an unpaid balance if the employee leaves the company before the loan is paid in full. In some states, a balloon payment of a loan with the last paycheck is unlawful.

What can you deduct from an employee’s last paycheck?

  • Mandatory deductions
  • Voluntary deductions. However, these should be made with care e.g. paying for benefits that the employee will not receive
  • When is it due? If proper notice is given, the employee should be able to receive their last paycheck on their last day at work

Cheryl D. Orr, Esq. is a partner and co-chair of the national Labor and Employment Practice Group at Drinker Biddle & Reath LLP (www.drinkerbiddle.com). She concentrates her practice on defending employers against FLSA collective actions and state and federal wage and hour class actions, and she regularly litigates discrimination, harassment, and unfair competition claims, conducts high-level workplace investigations, develops plans for reductions in force, and offers employer advice and counseling.

Heather M. Sager, Esq. is also a partner in the Labor and Employment Practice Group at Drinker Biddle & Reath LLP. Sager focuses her practice on management-side representation in collective and class actions, with particular experience in wage and hour litigation under state and federal law, including representative claims brought under California Business & Professions Code Section 17200.

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