Withholding Money From Former Employees' Paychecks

Small business owners know that employee turnover is inevitable. Most people don't stay in one job for life anymore. Employers must know what to do when an employee leaves a job owing money or property.

Can employers withhold money from former employees' final paychecks to recover losses to the business?

State and federal labor laws dictate what employers can and can't withhold from employee wages, including the final paycheck. Federal laws define what employers may do, but state laws tell them what they can do.

This article discusses what you can and can't deduct from your employees' paychecks, including the final paycheck.

To learn more, visit FindLaw's Wage and Hour Laws page.

Federal Law on Paycheck Withholding

The Fair Labor Standards Act (FLSA) allows employers to make paycheck deductions for unreturned company equipment, cash shortages, or damage to the employer's property. The only requirement under the FLSA is that these deductions don't reduce the worker's final pay below the federal minimum wage.

Employers can't use wage deductions to cover the cost of items that benefit the employer. In other words, an employer can't require workers to buy uniforms or equipment for use on the job and then deduct that cost from their paychecks.

Employers can usually write those costs off as business expenses. If the employer does want the employee to pay for some items, the cost may not cause the wages to fall below the federal minimum wage.

A few examples of things that might come out of an employee's paycheck include:

• Uniforms: If state law or the job requires a uniform, the employer may deduct the cost of providing the uniform from the worker's paycheck. If the employer provides optional cleaning and maintenance of uniforms, they can deduct the cost from the employee's check. But they can't force employees to bear the cleaning costs.
• Tools or other equipment: If needed for the job, get legal advice before making these deductions. Ownership of the property might become an issue if the employee purchases the tools or equipment.
• Financial losses caused by the employee: This covers things like cash register shortages, theft, or property damage.

Employers can make other deductions under U.S. Department of Labor guidelines. Employees are still entitled to overtime wages even if the employer makes these deductions.

State Laws on Paycheck Withholding

As we discussed above, federal law allows for some types of paycheck deductions. But states can create their own rules to protect workers.

A few states follow FLSA requirements and let employers make deductions. Or they leave the decision in the hands of collective bargaining agreements. The majority of states do not allow deductions from any paychecks, including final paychecks.

In general, states don't permit deductions from final wages unless the employee previously consented to such deductions in writing. These restrictions apply whether the employee quits or is terminated for cause. A few states require a court order for employer withholding.

State Regulations on Payday Deductions

In the table below, you'll find general requirements for each state related to paycheck deductions.

State laws don't apply to court-ordered payroll deductions, such as wage garnishments for child support. Employers may deduct insurance premiums and pension contributions with the employee's written consent.

Laws for FLSA-exempt employees differ in each state. Employers should consult an employment law attorney with questions before attempting payroll deductions for reimbursement.

Recovering Unreturned Company Property

Employers should be proactive when it comes to recovering unreturned company property. All employees receiving company equipment should sign a separate "return of company property" document.

This document should explain what recourse the employer has if the employee fails to return company property in a timely manner after they leave.

Employers should discuss this option with an employment attorney to ensure they've followed all state and federal requirements.

Get Legal Help

Compliance with federal and state wage laws is essential. The DOL and state labor offices assess stiff penalties for violations of paycheck deduction laws. Employers should speak with an employment law attorney in your state before proceeding with any deduction.