Be Wary of Employee Pay Deductions—They Can Cost You!

Do you believe that deducting from an employee’s wages can be done at an employer’s discretion? Not so fast! The law scrutinizes pay deductions very carefully, and it’s not as cut and dried as you might think. Attorney Ted Boehm has the facts when it comes to pay deductions.

Boehm, an associate with the law firm of Fisher & Phillips, LLP, provided his insight into this tricky wage and hour issue in a recent webinar presented by BLR® and HR Hero®.

Why Should You Care About It?

Claims from employees under the Fair Labor Standards Act (FLSA)—that’s why! Boehm notes that FLSA lawsuits can leave noncompliant employers responsible for expensive attorneys’ fees, making them attractive to employees and plaintiffs’ attorneys alike. Other costs may include:

• Back pay
• Liquidated damages
• Civil money penalties
• Injunctions
• Criminal penalties
• Time and trouble
• Damage to the organization’s reputation

Claims under the FLSA have skyrocketed over the last 10 or so years, says Boehm. More than 8,100 lawsuits were filed in 2014—a 20 percent increase since 2010—and these numbers do not even include wage and hour lawsuits based on state laws, which can be even more restrictive.

“Wage theft” has become a buzzword among plaintiffs’ lawyers and both federal and state departments of labor, warns Boehm. In this environment, the utmost care must be taken with pay deductions.

Are you streamlining your payroll tasks for maximum effect? Start right now with the free white paper from Kronos, Take Control of Your Payroll Process. Learn More

Pay Deductions for Nonexempt Employees

The federal minimum wage is currently at $7.25 per hour, but Boehm reminds employers to be sure to check their state’s minimum wage laws (as well as keep abreast of any possible increases to the federal minimum).

The general rule for employers to keep in mind is that no pay deductions should be made that cut into a nonexempt employee’s minimum wage. This should be your guiding principle, says Boehm. Common examples of deductions that can get you into hot water if not applied carefully include:

• The cost of replacing a broken tool;
• The cost of repairing damaged equipment;
• The cost of uniforms;
• Mileage; and/or
• Cash shortages.

This is not to say that deductions can’t be made—they just must be FLSA-compliant. To demonstrate, Boehm offers the following example:

Alice takes a part-time job as a stagehand at the Dinner Theater (this is in an area where only the $7.25 federal minimum wage applies—again, check your state laws!). She will make $8.50 an hour and will work exactly 20 hours every workweek. She must buy three costumes (i.e., uniforms) from the theater at the cost of $50 each.

The Dinner Theater will deduct $15 each workweek from her wages until the $150 is paid. Is this an FLSA minimum-wage violation?

Well, let’s look at the numbers, says Boehm. In a 20-hour workweek, Alice makes $25 more than the minimum wage (when you do the math, [$8.50 – $7.25] × 20 hours = $25). Therefore, a $15 uniform deduction will not take her weekly pay below the FLSA minimum wage—but taking the $150 all at once will.

Learn how automated, integrated solutions can help make payroll more painless. Download the complimentary best practices report, Take Control of Your Payroll Process. Click Here

Exceptions to the Rule

There are a few caveats to the general rule, Boehm points out. You can cut into the minimum wage in order to deduct for:

• Taxes,
• Child support orders,
• Group health insurance premiums,
• Charitable contributions, and
• Wage advances and loans.

That last point—wage advances and loans—seems to be a recurring problem where employers aren’t quite sure what to do, says Boehm. According to the Department of Labor (DOL), the principal amount of a loan or wage advance may be deducted from an employee’s pay even if the deduction cuts into the minimum wage. However, an employer CANNOT charge an administrative fee or interest on the loan/advance if such a charge, combined with the loan/advance itself, brings the employee’s wages below the minimum wage.

Your best practice here is to not charge an administrative fee or interest if you provide wage advances and/or loans to employees, says Boehm, and he notes many employers have policies against advances/loans altogether.

Overtime

Similar to minimum wage requirements, employers need to watch for deductions that cut into overtime pay, says Boehm. Employees must be paid in full for their overtime work—no employer deductions!

Boehm also seeks to dispel some myths among employers—there’s no such thing as “comp time” for nonexempt employees in the private sector; a 50-hour workweek and a 30-hour workweek do not equate to two 40-hour workweeks; and an employee cannot agree to waive overtime—there’s no “opting out” of the overtime requirement, even if an employee requests it.

In tomorrow’s Advisor, Boehm reviews pay deductions for exempt employees, plus an introduction to the free white paper from Kronos, Take Control of Your Payroll Process.