Are you allowed to deduct the overpayment from a worker’s next paycheck? And, does the employee’s submitted electronic timesheet amount to a written authorization for the deduction? This was the scenario laid out in a recent employer request for an opinion from the California Division of Labor Standards Enforcement (DLSE). We’ll explain the DLSE’s position.

Deductions Can Be Legal

The DLSE opined that deductions like the one here can be legal. Specifically, periodic deductions from wages authorized in writing by an employee to recoup predictable, expected overpayments that occur as a consequence of the employer’s payroll practices don’t violate California law. The DLSE, however, stressed the following points and cautions:

1. Written authorization required. Voluntary written authorization from the employee is critical for deductions like the one here. The agency explained that Labor Code section 224 permits a deduction that doesn’t amount to a rebate or deduction from the standard wage arrived at through a union contract, wage agreement, or statute, so long as the deduction is authorized by the employee in writing. Furthermore, the deduction must be one that doesn’t violate the prohibition in Labor Code section 221 against unlawful collection of wages previously paid.

The DLSE pointed out that the deductions made in this case don’t amount to an illegal rebate or deduction, because the employer is simply recouping an overpayment of an ascertainable amount (that is, hours not worked in the prior pay period). What’s more, the employee is still receiving the full of amount of wages owed for the time worked.

However, cautioned the DLSE, an employee’s submitted timesheet, whether paper or electronic, doesn’t amount to written authorization for this type of deduction unless the timesheet “expressly and voluntarily authorizes a specific prospective deduction.”

2. Never deduct from final paychecks. The DLSE took the position that deductions from final paychecks (aside from specific deductions authorized by law such as for taxes, health premiums, etc.) are never permitted, even if the employee provides written authorization. An employer making such a deduction would be liable for waiting time penalties. The DLSE based its opinion on Labor Code section 203, which requires full payment of wages when an employee is discharged or quits. According to the DLSE, deducting from a final paycheck for prior overpayments violates the law because it deprives the employee of all final wages.

3. Don’t reduce pay below minimum wage. Finally, the DLSE stressed that a deduction to correct an overpayment is permissible only if employee still receives, after the deduction, not less than the minimum wage.

The new opinion letter is available online at www.dir.ca.gov/dlse/opinions/2008-11-25-1.pdf.