5 Things to Know About Wage Deductions in California

Under California law, all earned wages are the employee's property, so employers may make deductions from employees' wages only under certain circumstances.

Improper deductions can lead to claims for underpayment, which can result in steep penalties, including "waiting-time" penalties for underpayment of final wages that are due when the employment relationship ends. Therefore, employers in California should ensure that they properly document wage deductions and comply with the California Labor Code, the Industrial Welfare Commission's Wage Orders and case law.

Here are five key points that employers should understand about making wage deductions in California.

1. Authorized deductions are limited.

Under the California Labor Code, employers can make deductions from employee wages if the deductions are:

• Required or "empowered" by state or federal law.
  
• Expressly authorized in writing by the employee to cover insurance premiums, or hospital or medical dues.
  
• Considered "other deductions not amounting to a rebate or deduction" from the agreed upon or minimum wage.
  
• Made to cover health and welfare or pension plan contributions expressly authorized by a collective bargaining or wage agreement.
  

In short, the labor code allows pay deductions without an employee's agreement for tax withholdings, garnishments or court orders, and contributions to pension or health benefit plans. However, employers must comply with both federal and state laws when making these deductions, particularly with respect to the limits on the amount deducted. The labor code also permits written, authorized deductions for insurance benefit premiums "or other deductions." But the employee's agreement alone is not enough to satisfy this exemption. The nature of the deduction must fall within the statute's categories.

2. Some other agreed-upon deductions are allowed.

There is limited authority for what constitutes "other deductions" that employees may authorize. In 1944, the California attorney general opined that "other deductions" are only those that benefit the employee, and California courts have adopted this view.

If an employee authorizes paycheck deductions to purchase personal items—such as food and beverages from an employee cafeteria—that would appear to be a deduction for the employee's benefit. Similarly, deductions for employees' participation in a stock purchase plan likely are permissible for the same reason.

[SHRM members-only toolkit: Complying with California Wage Payment and Hours of Work Laws]

However, if the employer charges the employee an arbitrary fee for a product or service, the charge could be deemed an unlawful rebate of earned wages. For example, if an employer imposes a charge for onsite meals or lodging regardless of whether the employee uses the facilities, such charges may not be for the employee's benefit.

3. Employers must absorb the cost of employees' mistakes.

California law does not allow employers to make deductions from employees' wages for losses due to an employee's ordinary negligence. For example, it would be unlawful to deduct the cost from wages if an employee carelessly left a company laptop on a train or if a cook negligently burned a prime rib. The employer may impose disciplinary action for negligence but must absorb the cost of damage to its property.

Similarly, employers may not make employees the "insurer" of business losses. For example, an employer cannot deduct from a salesperson's commissions any unidentified returns on sales that are not directly attributable to the individual salesperson. Similarly, the employer cannot deduct from a bonus the cost of inventory shrinkage due to theft.

What about an employee's reckless, intentional misconduct? The state wage orders permit employers to hold employees responsible for a "shortage, breakage or loss [that] is caused by a dishonest or willful act or by the gross negligence of the employee." However, employers cannot deduct associated losses from employees' wages. Employers must assert such claims in court or arbitration. Furthermore, employers should note that they would have to prove that the loss resulted from the employee's dishonesty, willfulness or grossly negligent act, according to the California Department of Industrial Relations.

Employers that supply uniforms and equipment to employees shouldn't make deductions from employees' final pay for the cost of unreturned items, because the California Division of Labor Standards Enforcement doesn't believe such deductions are permissible under the state's garnishment and employee bond statutes.

4. Commission and bonus plans should be carefully worded.

Employer commission or incentive plans sometimes authorize employers to make certain deductions. Whether these agreements are lawful depends on how they are drafted. For example, it is lawful to require reconciliation of advances or draws against earned commissions. Similarly, employers may recoup overpaid commissions in certain situations, such as if the merchandise is returned.

The written commission plan should clearly explain that commissions paid before they are earned are advances, which become earned wages only after all conditions (e.g., receipt of payment, a time period for returns has passed) are satisfied.

Bonus plans, too, require careful drafting. For example, it is illegal for an employer to deduct losses due to third-party theft from a manager's bonus. However, it is lawful to base a bonus formula on a retail store's profits, which would include business losses, such as those from breakage or theft.

5. Employers don't have a right to 'self-help.'

It is unlawful for an employer to deduct a debt—such as a loan, advance or overpayment—from an employee's earned wages. For example, the California Court of Appeal has held that a public employer made an unlawful deduction from employees' paychecks when it deducted an inadvertent overpayment from an earlier pay period. The employees owed the employer a debt, but the employer was an ordinary creditor and therefore required to follow the state's garnishment law, the court said. In response, California's legislature passed a statute allowing the state to set off state employees' debts but did not extend that privilege to private employers.

The Court of Appeal also has held that an employer could not enforce an employee's promissory note by deducting the outstanding balance from the employee's final paycheck. Again, the employer was considered a creditor that had no right to "self-help." Recently, a U.S. district court refused to uphold Costco's agreement to deduct outstanding Costco credit card balances from employees' final pay.

Employees may agree to deductions that are made for their benefit, at least during their employment. The California Division of Labor Standards Enforcement will respect an employee's voluntary agreement to repay a debt via payroll deductions, except from final pay. If employees do not agree to repay such debts, employers may pursue legal action against the employee.

An employer can make an agreement to recover advances against wages, because advances are simply prepayment of wages before they are earned. However, it is important to designate the payment as an advance and recover it quickly.

D. Gregory Valenza is an attorney with Shaw Law Group in San Francisco. Jennifer Shaw is an attorney with Shaw Law Group in Sacramento, Calif.