What are the rules in California regarding wage deductions?

Under California law, an employer can lawfully withhold amounts from an employee's wages only in the following circumstances:

• When required or empowered to do so by state or federal law.
• When a deduction is expressly authorized in writing by the employee to cover insurance premiums, benefit plan contributions or other deductions not amounting to a rebate on the employee's wages.
• When a deduction to cover health, welfare or pension contributions is expressly authorized by a wage or collective bargaining agreement (Labor Code Sections 221 and 224).

Deductions for Cash Shortage, Breakage or Loss of Equipment

The ability of an employer to deduct amounts from an employee's wages due to a cash shortage, breakage or loss of equipment is specifically regulated by the Industrial Welfare Commission (IWC) Wage Orders and is limited by court decisions (Kerr's Catering Service v. Department of Industrial Relations, 57 Cal.2d 319 (1962)). An employer cannot legally make a deduction from an employee's wages if, by reason of an employee's mistake or accident, a cash shortage, breakage or loss of company property or equipment occurs. The California courts have held that losses occurring without any fault on the part of the employee or that are merely the result of simple negligence are inevitable in almost any business operation, and thus the employer must bear such losses as a cost of doing business.

There is an exception contained in the IWC Wage Orders indicating that an employer may deduct from an employee's wages any cash shortage, breakage or loss of equipment if the employer can show that the shortage, breakage or loss was caused by a dishonest or willful act or by the employee's gross negligence. However, under this regulation, a simple accusation does not give the employer the right to make the deduction, and the Department of Labor Standards Enforcement (DLSE) has cautioned that the use of this deduction may, in fact, not comply with the provisions of the California Labor Code and various California court decisions.

Deductions for Employee Loans and Advances

Although a California court held that deductions for periodic installment payments on a loan made to an employee by the employer are permissible when authorized in writing by the employee, the court also concluded that the balloon (lump sum) payment of the outstanding balance to be made at the time the employment relationship ends is not allowed, notwithstanding the fact that the employee has given his or her written consent to such a payment. When the employment relationship ends, an employer can deduct only the amount of one installment payment from the employee's final paycheck (Barnhill v. Robert Saunders & Co., (1981) 125 Cal.App.3d 1).

In addition, California State Employees' Association v. State of California, (1988) 198 Cal.App.3d 374, held it unlawful to deduct past salary advances that were in error from current payroll, and Kirby Hudgins v. Neiman Marcus Group, Inc., (1995) 34 Cal.App.4th, held that deductions for unidentified returns from commission sales are unlawful.

Common Unlawful Wage Deductions

Some common payroll deductions often made by employers that are unlawful include the following:

• Gratuities. An employer cannot take gratuities given to or left for an employee or deduct any amount from wages due to an employee on account of a gratuity that was given to or left for the employee (Labor Code Section 351). However, a restaurant may have a policy allowing for tip pooling or sharing among employees who provide direct table service to customers.
• Photographs. If an employer requires a photograph of an applicant or employee, the employer must pay the cost of the photograph (Labor Code Section 401).
• Bond. If an employer requires a bond of an applicant or employee, the employer must pay the cost of the bond (Labor Code Section 401).
• Uniforms and equipment. If an employer requires that an employee wear a uniform, the employer must pay the cost of the uniform (Labor Code Section 2802). Under the Transportation Industry's IWC Wage Order 9 an employer may deduct the cost of a uniform from an employee's final wages if the employee does not return the uniform and if the employee gave prior written consent. Similarly, Wage Order 9 states that when tools or equipment are required by the employer or are necessary to the performance of a job, such tools and equipment must be provided and maintained by the employer, except that an employee whose wages are at least two times the minimum wage may be required to provide and maintain hand tools and equipment customarily required by the trade or craft. An employer may deduct the cost of tools or equipment from an employee's final wages if the employee does not return the equipment and if the employee gave prior written consent.
• Business expenses. An employee is entitled to be reimbursed by his or her employer for all expenses or losses incurred in the direct consequence of the discharge of the employee's work duties (Labor Code Section 2802).
• Medical or physical examinations. An employer may not withhold or deduct from the wages of any employee, or require any prospective employee or applicant for employment to pay for, any preemployment medical or physical examination taken as a condition of employment, nor may an employer withhold or deduct from the wages of any employee, or require any employee to pay for, any medical or physical examination required by any federal or state law or regulation or local ordinance (Labor Code Section 222.5).

Source: California DLSE, California Labor Code

Related resource: What are the rules regarding payment of final wages in the state of California?