What deductions can be made from severance pay?

After severance pay has been agreed to, employers often uncover the exiting employee owes money for unreturned equipment, unpaid company credit card bills or even previous advanced vacation/paid time off. Whether these amounts can be deducted from severance pay may depend upon both the severance agreement and state wage deduction laws. Employers will need to do some research before that question can be answered. 

The employer should first review the severance agreement of the separating employee. Some agreements may have clauses specifying that no outstanding monies owed by the employee can be deducted from the severance pay. Other agreements may be silent regarding the issues of deductions for monies owed; if so, how a state defines "wages" within its wage deduction laws will determine whether deductions can be taken from severance pay. 

State wage deduction laws determine what deductions may be taken from wages. Each state will define "wages" within those laws, and some states include severance pay within their definition of wages. In such cases, severance pay is handled in the same manner as all other wages in that state, and all state wage deduction will apply. This could mean that the deduction is clearly allowed, not allowed at all, or allowed with signed authorization from the employee.

In states where severance is not included in the definition of wages, employers may generally be able to make deductions from severance pay, but will want to do so under the guidance of legal counsel.

If an employer has reviewed both the severance agreement and the state laws and has determined that it cannot make deductions for unreturned equipment, unpaid company credit card bills or other monies owed, then an employer's options are limited. Company legal counsel could advise an employer whether mailing an "invoice" to the exiting employee is permissible. Another option might be to take the former employee to small claims court, though, depending on the amount owed, the cost of litigation could far outweigh the amount sought by the employer.