The Fair Labor Standards Act (FLSA) requires employers to pay a minimum wage and overtime to employees who are not exempt from the requirements of the FLSA. Whether deductions from wages can be made depends on the nature of the deduction and whether the deduction will reduce actual cash payments below the statutory minimum wage.
Deductions that do not reduce cash wages below the minimum level are generally permitted. Such deductions are lawful, even if the employer generates a profit by the deduction or is otherwise its primary beneficiary. Thus, an employer violates the FLSA by withholding bonuses generally paid on termination if such withholding brings the employee's regular rate of pay below the minimum wage.
The exception to this rule involves kickbacks. Since all wages, in whatever form, must be paid "free and clear," an arrangement that compels the employee to pay back a portion of his or her wages to the employer or to a third person for the employer's benefit is strictly prohibited.
When deductions from wages leave less than the minimum wage plus overtime compensation, the employer may not profit on the transaction even if the arrangement is beneficial to the employee.
Employers are allowed to make deductions from employee paychecks for contributions to pension or health and welfare benefit plans made on the employee's behalf. These deductions can be taken regardless of the effect on minimum wage requirements if the employee voluntarily agrees to the deduction, and neither the employer nor anyone acting on his or her behalf derives any profit or benefit from the contribution. Similarly, union dues may be deducted from an employee's wages pursuant to a valid check-off clause in a collective bargaining agreement.
Employers may make deductions from employee pay to the extent that they are agreed upon by the employee. Most deductions are prohibited to the extent that such deductions will reduce net pay below the minimum wage or overtime pay requirements.
Voluntary Wage Assignments, Loans and Advances. Sums paid by an employer under a voluntary wage assignment for the benefit of the employee may be deducted from the employee's wages. Administrative costs are not deductible to the extent that they reduce pay below the minimum wage or overtime pay requirements.
Similarly, loans and cash advances made by an employer to an employee may be deducted from the employee's wages, but deductions for interest or administrative costs on the loan or advance are unlawful to the extent that they cut into the minimum wage or overtime compensation otherwise due to the employee.
Uniforms and Uniform Allowances. If the wearing of uniforms is required, the cost of furnishing or maintaining such uniforms may not be deducted from wages if the deduction would reduce the employee's net pay below the minimum wage. Employees who must purchase a uniform must be reimbursed for the cost to the extent that it cuts into the required minimum wage or overtime.
Employee Tax Payments. Taxes assessed against the employee that the employer is required to collect may be deducted. Payment of Social Security taxes count toward the satisfaction of minimum wage and overtime requirements.
Cash Shortages. As a general rule, an employer cannot make deductions from an employee's wages for general cash shortages or for cash bonds to cover such shortages if the deduction would reduce the employee's net pay to below the minimum wage. In this regard, general cash register shortages, customer walkouts and bad or uncollectible credit card charges should be distinguished from losses resulting from employee theft or misappropriation. An employer may clearly require an employee to repay monies stolen or misappropriated.
Miscellaneous Deductions. The cost of tools or equipment furnished to employees may not be deducted from wages when the deduction reduces the employee's net pay to below the minimum wage. Nor can the cost of workers' compensation insurance be so deducted.
Other prohibited deductions include: transportation charges that are an incident of and necessary to the employment, visa and visa application fees for recruited workers, recruitment fees, and dues to chambers of commerce and other organizations, used to benefit the employer.
Questions for Your Attorney
- When can my employer legally make deductions to my paycheck?
- Can my employer make deductions from my paycheck to pay for my health insurance contributions if the deductions reduce my paycheck to below minimum wage pay?
- Can my employer deduct the cost of necessary tools from my paycheck if the deduction reduces my net pay to below minimum wage?