The Ins-and-Outs of Payroll Deductions

Clark Kingston came in the other day. He owns Ol’Softie, the largest manufacturer of upholstered living room furniture (i.e., sofas and loveseats) in California. The name
epitomized how comfortable his couches actually were. He loved that name so much that he got a vanity plate for his car in it.

As an accommodation to his employees, Clark sold them chairs and sofas at wholesale. And, as an extra benefit, he let them pay it off on time using payroll deductions.

That plan seemed to be working just fine until he sold about $1500 of furniture to Fred Johnson, an Ol’ Softie employee of only fifteen months. Fred signed an agreement saying
that Ol’Softie could take out $200 per paycheck. That worked for the first three payroll periods. Fred got his furniture and Ol’Softie got $600 toward the $1500.

But things slowed down and Fred, being relatively new, got laid off. This was not a development he appreciated. Then, he really got hot when he got his last paycheck.

He’d only worked 25 hours that week, making a gross pay of $375 (his hourly rate was $15). To add insult to injury, Ol’ Softie took out the $200 for the furniture, so that his gross
pay after the payment was only $175, or just $7.00 per hour. This, of course, is $3.00 less than California’s minimum pay of $10 per hour.

Fred ranted and raved, threatening to go to the Labor Commissioner if the deduction was not reversed. Clark decided to not fight him and did as Fred asked.

But bright and early the next day, Clark was at my office, wanting to know who was right and what his options were. For instance, could he have stood firm and actually taken the
entire paycheck to reduce what Fred owed for the furniture?

I explained that there were a couple of crucial elements to this situation. First, this was Fred’s final paycheck. There are cases that specifically prohibit employers from deducting
any debt payments owed to the employer in the employee’s final paycheck. For instance, in Barnhill v. Robert Saunders, the Court of Appeal emphatically told Saunders, who had
loaned Barnhill (its bookkeeper) some money, that it could not take any payments from Barnhill’s final check.

The Court in Barnhill said to allow an employer “to reach [an employee’s] wages by setoff would let it accomplish what neither it nor any other creditor could do by attachment.”

So, could Ol’ Softie at least deduct the normal $200 payment? The answer is, No. Federal law forbids an employer making any deductions (outside of ones for insurance or
unemployment or the like) that reduces an employee’s wages to below the minimum wage.

Clark was clearly frustrated. “Well, what about the fact that Fred stumbled and dropped a huge cup of coffee on some of my best fabric, ruining over $1,000 of material?”

In short, my answer was again, “No.” State law does not allow an employer to deduct for losses such as cash shortage, breakage, or loss of equipment caused by an employee’s
negligence. If you can show the employee was grossly negligent or did something intentionally, then the deduction is arguably permitted.

But, overall, my advice to Clark was to tread carefully on the issue of payroll deductions, especially from final paychecks. ©

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