A Matter of Deduction
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A Matter of Deduction

September 2010


Cut, save, delay, slash, reduce, lay off, downsize. Across California, executives are doing everything they can to trim expenses and survive the current recession. Why not make employees pay for their personal use of a company car and simply deduct the cost from their paycheck? Or subtract money when they damage the company's equipment?

These may be interesting questions, but they are very bad ideas. Deducting funds for anything but a few specific purposes from California employees' paychecks can set up a ready-made wrongful-deduction class action.

Even seasoned human resource professionals may stumble over wage deductions because the issue involves a busy intersection of federal and state law, administrative regulations, and union and employment contracts. Federal law in this area is not preemptive, and therefore each state has its own rules for wage deductions. In California, the law is not particularly clear because of opaque statutes and a lack of reported cases. But the danger of a misstep is real.

Adding to the risk, improper-deduction class actions are easier to prosecute because the state requires employers to retain wage information for two years, including deduction documentation. (Cal. Lab. Code § 1174.) A certifiable class almost always exists when a common deduction scheme is in place and the deduction injury is easy to calculate. Treble damages and attorneys fees loom on the horizon for successful claimants.

Proper Deductions
California employers can avoid liability for paycheck deductions in the following four generally permissible categories: taxes; health insurance; union dues; and pensions and health savings accounts.

State law allows for tax and health insurance premium deductions for all employees, and deductions pursuant to a collective bargaining agreement for union dues, pensions, and health savings accounts. (Cal. Lab. Code § 224.)

Not So Much
Uniforms are one of the oldest wage deductions, harking back to 19th- century England. But these are not Dick- ensian times; California has outlawed this practice. (Cal. Lab Code § 2802; Cal. Industrial Welfare Comm'n (IWC) Orders at § 9, available at www.dir.ca .gov/IWC/WageOrderIndustries.htm.)

A more modern quandary is whether an employer can deduct money from wages to pay for damages to company equipment, or to make up a cash-drawer shortage. But unless an employee's actions were willful or, at the very least, reckless, California law does not allow such deductions. (Cal. IWC Orders § 8.)

Loans Can Be Tricky
It is legal for an employer to loan money to a California employee and deduct the periodic repayments from an employee's paycheck, provided that the employee consents to the arrangement.

But a lump-sum deduction is not allowed. Thus, if a California employee owes an outstanding balance when his or her employment ends, the employer's only recourse to recoup the debt is through the courts. The employer may not make a lump-sum deduction from the employee's final paycheck (Barnhill v. Robert Saunders & Co., 125 Cal. App. 3d 1, 4 (1981)).

Employers must also keep an eye on whether their California employees are subject to wage and hour laws. (Cal IWC Orders, § 1.) Exempt employees are those who receive a guaranteed weekly salary and aren't eligible for overtime pay. But state and federal law mandate that nonexempt employees be paid at least the minimum wage for every paycheck, regardless of how justified or legal a deduction may be, or how much that employee may owe the employer (Kettenring v. Los Angeles Unified School Dist., 167 Cal. App. 4th 507, 512 (2008)).

And when it comes to exempt employees, an improper deduction risks losing not only the exempt status for a particular employee, but potentially for an entire class of employees as well. If that happens, the employer may be open to an expensive overtime claim.

Get It in Writing
As a general rule, California requires that employees authorize all deductions from their paychecks. The best practice is to get everything in writing prior to any deduction. Also, employers should visit the California Department of Industrial Relations website (www.dir.ca.gov) and read its rules for written authorization and deductions.

Though the law of wage deductions has many twists and turns, common sense goes a long way. Prudent employers who utilize experienced counsel will get their own deduction of sorts-because legal compliance ultimately is much cheaper than an improper bite into an employee's paycheck.

Rory J. Diamond is an associate in the Los Angeles office of Alston & Bird and a member of the firm's labor and employment group.

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