Authorized Employee Payroll Deductions

Here's What Employers Should Know About Employee Deductions

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There are a number of situations in which an employer may have thought about cutting an employee's pay, but there are legal wrinkles when it comes to employee deductions that all employers should understand.

For example, an employer cannot cut employee wages to make the employees pay for the amount the owner lost in a theft. Employers who want to discipline employees must find a different way to do it besides withholding paychecks. Of course, an employer may be forced to give all employees a wage cut, but cutting an individual employee's pay is discriminatory.

Note: The following is for informational purposes only and should not be construed as legal advice. You should consult with an attorney before taking any action based on the below information.

When Employers Can Make a Wage Deduction

The only way an employer can take money from employee pay is:

  1. If the employee has specifically authorized the deduction plan. For example, the employee may agree to contributions to a "flower fund" to pay for flowers for funerals, or for United Way or other charities. The employee must approved of this in writing. Employees must also agree to pay deductions for benefit contributions. An exception to this rule is if an employee makes a deduction for items that are necessary for the business, like uniforms.
  2. For income tax withholding. Every employee must complete Form W-4 at hire specifying the amount of withholding for federal taxes. For all states where the employee works which have income tax, the employee must also complete a withholding form. The withholding form allows the employer to take withholding (a specific form of deduction) from employee pay. The employee gets to specify the amount of the deduction.
  3. By contract. In a union contract, for example, employee pay may be deducted for union dues, depending on the contract and state laws. The employee may have an individual employment contract which authorizes certain specific deductions. Employer loans to employees may also be deducted.
  4. By a court. A court may require you to garnish employee wages for child support, non-payment of debts, or other purposes. The employee does not have to consent to this deduction.
  5. Employee-requested deductions. These can be made at any time. An example might be an employer loan to an employee (a loan agreement should be signed), which the employee is paying back with payroll deductions. Other employee-requested deductions, such as to the United Way, U.S. savings bonds, or union dues, should also have a signed agreement in the employee's file.

In every case, there must be a written record in the employee's payroll file that the employee agreed to the deduction.

What Deductions Are Prohibited

Employers may not deduct the following from employee pay, under any circumstances:

  • Employment taxes required to be paid by employers, such as federal unemployment tax (FUTA) or state unemployment tax
  • The cost of bonding an employee
  • Service charges or fees for garnishments (although these may be permitted by state law)

Some deductions without the express consent of the employee are restricted or limited, including:

  • Lost or damaged tools
  • Cash shortages
  • Uniforms or cleaning uniforms, when required
  • Interest owed on an employer loan to an employee

Deductions for Exempt vs. Non-Exempt Employees

Exempt employees are those who are exempt from overtime (non-exempt employees can be paid overtime). Employers are not usually allowed to take deductions from the pay of exempt employees. Some deductions for non-exempt employees are limited or restricted:

  • Involuntary deductions cannot result in the employee's being paid less than the federal or state minimum wage, whichever is higher.
  • And deductions cannot be taken in a week when the employee worked overtime.

Payroll Taxes

The only exception to the requirement for specific employee authorization is FICA taxes: Social Security and Medicare taxes. The employee portion can be deducted from employee pay without specific consent since these deductions are required by federal law. This allowance applies to the new additional Medicare tax, which is withheld from higher-income employees once they reach a specific pay level.

If an Employer Wants to Cut Employee Pay

Employers need to know that employees have the right to contact the state employment department or state labor board if their pay is cut without consent (except as stated above). As an employer, you don't want the state labor department coming into your business in response to employee complaints. They will do a complete audit and may find other employment law violations. They also may decide to contact federal agencies if they find federal violations.

Retaliation

Don't think about firing employees because they filed a complaint. Federal and state laws protect employees against wrongful termination.