Legal Analysis—Deductions From Pay—Federal

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The federal law on deductions from pay contains few restrictions when compared to the laws in many states. Under federal law, almost any deduction is permitted, even if it reduces the employee's pay below the minimum wage in some cases. Certain deductions may specifically reduce pay below the minimum. However, there are a number of deductions that may not be made if they result in pay that is less than the minimum wage. These rules apply only to nonexempt employees who are covered by minimum wage requirements. In general, deductions from pay should be made only where required by law or authorized in writing by the employee.

Check for State Restrictions

Many states regulate wage deductions much more strictly than does the federal government. Accordingly, the rule that is most advantageous to the employee will control. Refer to the state Deductions From Pay section for additional information.

An employer may deduct the "reasonable cost" of providing the following items even if the employee's cash wage drops below the minimum wage:

Federal, state, and local taxes. The required withholdings for federal, state, and local taxes, including FICA, may reduce wages below the minimum wage. However, an employer may not deduct from the employee's wages taxes that the employer is required to pay.

Meals, lodging, and other facilities. The reasonable cost or fair value of meals, living quarters, or other facilities may be credited as part of the minimum wage. "Fair value" is not retail value; it may not include any profit to the employer or its associates. The employees must be told that these amounts are being deducted from their wages, and they must voluntarily accept the deductions. The facilities must be for the benefit of the employees. If they are for the employer's benefit, they may not be credited against the minimum wage. For example, if an employer gives employees supper money because it needs them to work overtime, that supper money may not be credited against the minimum wage.

Transportation provided by the employer. This may be credited against the minimum wage, but only if the travel time does not count as time worked and is not necessary to the employer.

Fuel and merchandise. Fuel for residential heating and cooking and general merchandise provided by company stores may be credited against the minimum wage, but only if they are reasonably connected to board or lodging.

Instructional costs. Tuition furnished by a college to its student employees may be credited against the minimum wage.

Deductions that benefit the employee. This category includes deductions for life insurance, health insurance, pension, and welfare plans; contributions to charity; repayment of salary advances; and the purchase price of U.S. Savings Bonds. These deductions may cut into the minimum wage if the employee freely assents and if the employer derives no profit or benefit from the deductions.

The following items may be deducted from pay, but the resulting wage must be at least the federal minimum wage:

Shortages. Employers have a limited right to recover cash shortages from cashiers and other employees who handle money. Employees should be notified in a written agreement signed by both the employee and the employer that such deductions may be made.

Note: In the case of misappropriation by the employee as opposed to a mistake, it may be possible to deduct the full amount of the theft, even if it reduces the employee's pay below the minimum wage.

Personal use of company car. Employers may deduct these costs, but only if the employer does not benefit from such use.

Uniforms. Employers may deduct the cost of providing and maintaining employee uniforms if uniforms are required by law, by custom, or by the employer. The uniform must be an actual uniform and not just a certain type of basic street clothing, and the deduction must not reduce wages below the minimum.

Note: In some cases, new employees are required to pay in advance, post a bond, or make security deposits for uniforms. In such cases, the employee must be reimbursed no later than the first regular payday to the extent that these costs brought the employee's pay below the minimum wage. However, employers are not required to reimburse employees for required clothing that does not have a company logo and could be worn outside of work for nonwork activities (e.g., the employer requires employees to wear khaki-colored pants and a navy blue golf shirt) even if the cost of such clothing reduces the employee's wages below the minimum wage.

Tools. Employers may deduct the cost of providing the "tools of the trade" and other material necessary for carrying out the employer's business as long as the deduction does not reduce the employee's pay below the minimum wage.

If an employee requests an employer to make deductions and pay them to a third party, the employer may do so if the following requirements are met:

Examples of voluntary assignments that are acceptable include: union dues under a check-off system, savings bond purchases, insurance premiums, and voluntary contributions to charity. Also, the laws of some states permit employees to assign their wages voluntarily in order to repay their debts. Assignments that are unacceptable are those from which the employer or anyone acting on its behalf or in its interest derives any benefit, either directly or indirectly.

Union dues. Employers should withhold union dues and remit them to the union as stipulated in an agreement between them. Those employees who elect not to join the union may be required to reimburse the union for expenditures related to the benefits they receive from collective bargaining, contract administration, or grievance adjustment. However, nonmembers cannot be required to pay for nonrepresentational activities, such as contributions to political causes.

An involuntary assignment of wages-also called a garnishment-requires an employer to deduct certain amounts from an employee's wages in order to repay the employee's debts. Employers are notified of garnishments through official court papers. See the national and state Garnishment sections for further details.

Recouping Money Owed by the Employee

Employers are often faced with the situation where an employee owes the company money but a deduction from wages would violate state or federal law.

The employer's rights in such a situation are similar to those of other creditors. The employer could fire the employee and then file a civil suit to collect the money owed or simply write off the debt. If permitted by state law, the employer could also try cashing the employee's paycheck for him or her and ask for the money directly. This may seem like a subterfuge, but there are probably only two cases in which it would be questioned: If there is evidence of duress (e.g., you refuse to let the employee go home until he or she pays the debt), or if it is a regular practice (in which case it could be interpreted as an attempt to evade the law). See the national Loans section for more details.

When an employee destroys company property or fails to return it after termination, the employer's ability to recoup the loss through a payroll deduction is extremely limited and varies from state to state. As a general rule, any amount that is deducted from a nonexempt employee must not put the employee's wages below the minimum wage.

In weeks where employees work overtime, the amount that may be deducted must be calculated based on a 40-hour week. Assume, for example, that the applicable minimum wage is $5.15 per hour and the employee's pay rate is $6.15 per hour. If the employee works 40 hours in a week, $40 may be deducted from pay for items such as uniforms. If the employee works 50 hours, the maximum deduction is still $40. The employee must be paid $206 in straight-time cash wages ($6.15 per hour x 40 hours minus $1 per hour x 40 hours) and $92.25 in overtime cash wages ($6.15 per hour x 10 hours x 1.5).

Additional information on deductions from pay can be obtained from:

U.S. Department of Labor
Wage and Hour Division
Frances Perkins Building
200 Constitution Avenue, NW
Washington, DC 20210

866-487-9243

http://www.dol.gov/esa/whd