Employers can deduct money from an employee’s paycheck under certain conditions. There are different rules for deductions taken from an employee’s final paycheck and deductions during on-going employment. Many deductions require an advance agreement between the employee and the employer. Other paycheck deductions are mandatory such as federal income taxes, Medicare, workers’ compensation, etc.
Some deductions are not allowed to take an employee’s net pay below the minimum wage.
Allowable paycheck deductions
The following deductions may be made, even if the deduction takes the employee’s wages below the state minimum wage:
- Deductions required by state or federal law, such as federal income taxes, Medicare, workers’ compensation, etc.
- Court-ordered wage garnishments
- Deductions that benefit the employee, when the worker has agreed to the deductions in advance. When these deductions are made during on-going employment, the agreement must be in writing. Final paychecks can have an oral agreement. For example:
- Personal loans (cash advances, 401(k) or retirement loan payment, bail or bond payments, etc.)
- Personal purchases of a business’s goods or services such as:
- Food purchases from the cafeteria
- Equipment purchased from employer
- Rent for living on employer-owned property
- Employee’s health, dental, vision, and other insurance payments or co- payments
- Deductions for medical, surgical, or hospital care or service.
For any of the deductions listed above, employers may charge retail prices and reasonable interest for loans, but they cannot otherwise financially profit or benefit.
Deductions only allowed from final paychecks
Except for the deductions listed above, any deductions from final paychecks may not take the employee’s final paycheck below the minimum wage.
The following deductions are allowed only when there is an oral or written agreement between the employee and employer and the incidents described occurred during the final pay period:
- For covering a cash shortage in the till – if the business has established policies regarding cash acceptance, the employee has sole access to the till, and the employee counted the cash at the start and end of the shift.
- For covering the cost of a lost or damaged equipment – if the equipment damage or loss can be shown to be caused by the employee’s dishonest or willful act.
- For acceptance of a “bad check” (NSF) or credit card purchase – if the business already has policies for check and credit card acceptance at the time of the incident.
- For worker theft – if the employee’s actions are shown to be dishonest or willful and the employer files a police report.
It is the employer’s responsibility to prove the employee’s alleged actions and the existence of any policy, agreement, or procedure.
Employers should notify employees of all policies, agreements, and procedures for final paycheck deductions. These policies should be made in writing and signed by employees.
Prohibited paycheck deductions during on-going employment
During an on-going employment relationship, employers cannot deduct any of the following:
- Reimbursement for a customer’s bad check or credit card
- Cash register shortages – even when an employee counts their till at the beginning and end of their shift, has sole access to the cash register, and is short at the end of the shift.
- Customer walk-outs, theft, or unpaid bills
- Damages to or loss of company equipment
Retroactive paycheck deductions of workers’ compensation premiums
Generally, you may deduct from an employee’s paycheck one-half the Medical Aid Fund portion of the worker’s compensation premium. If an employer regularly fails to deduct the employee’s portion of the premium, the employer may not retroactively deduct this amount from the employees’ paycheck. If the error was infrequent and inadvertent, the employer may assess if the overpayment regulation would apply.
Overpayments
An overpayment occurs when an employer unintentionally or accidentally pays more than an employee’s agreed-upon wage rate or for more hours than they actually worked.
Employers can only deduct an overpayment from an employee’s paycheck if it is:
- Inadvertent,
- Infrequent, and
- Discovered within 90 days of the overpayment.
If an overpayment is not detected within 90 days, the employer cannot adjust an employee’s current or future wages to recoup the overpayment.
The employer must provide advance written notice and documentation of the overpayment to the employee before any adjustment is made. This notice must include the terms under which the overpayment will be recouped.
For example, an employer may offer to split the deductions for overpayment over multiple paychecks or deduct the entire amount at once. Recouping the overpayment may reduce the employee’s gross wages below the state minimum wage.
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