February 23, 2021
Wage Deductions: Can You Charge Employees for Mistakes?

If you have owned a business with employees for any length of time, chances are at least one of those employees has made a mistake. After all, you work with humans, it’s bound to happen. 

What kind of mistakes are we talking about?

  • Cash or cash register shortages
  • Acceptance of bad checks
  • Lost, damaged, or broken equipment

For example, Maddie spills a drink all over her work laptop, to the point of no return. Jack miscounts change, causing a shortage in the drawer. Michael mishandles a forklift, damaging some products and expensive equipment in the warehouse.

Now, you may be wondering, Can I charge employees for these mistakes?

Businesses often put policies in place requiring employees to reimburse them for lost and damaged property. Typically, the policy states the employer would take a payroll deduction or a deduction from the employee’s final paycheck.

Before you make a payroll deduction or put a loss reimbursement policy in place, however, you should know the specific employment laws. There are both federal and state regulations that restrict and prohibit these deductions. Let’s break it down below.

When can employers deduct losses from an employee’s paycheck? 

Federal Law

The Fair Labor Standards Act (FLSA) states that wage deductions for loss or damaged property are allowed only if:

  • The employee is non-exempt;
  • The employee signed an agreement before the loss of damage (i.e., at the beginning of employment or when the policy goes into effect); and
  • The deduction does not bring employee’s hourly rate below minimum wage.

Federal law does NOT allow employers to charge exempt employees for losses—even if the employee signed an agreement. These deductions would defeat exemption because it would reduce the guaranteed salary, violating the salary basis rule which prohibits reductions in compensation due to the employee’s quality of work.

State Laws

Regulations around deductions for loss and damaged property vary by state. While the Federal Law allows employers to deduct as long as certain requirements are met, some states prohibit deductions altogether. 

Let’s look at a few examples:

New Hampshire: Employers may not deduct cash shortages or breakage, damage, or loss of employer property. They can only make deductions to follow federal or state laws (like taxes) or when employees agree to deductions for their benefit (like insurance premiums).

California: Deductions for loss and damage are typically not allowed because the state considers these to be an ordinary cost of doing business. Deductions may be permitted if the employee acted with dishonesty, gross negligence, or intent.

Illinois: Employers can only dock pay for a mistake if the employee agrees to the deduction in writing at the time the deduction is made. This also applies to unreturned employer property, even if the employee previously signed an agreement authorizing the deduction.

Be sure to check with your state’s Department of Labor to confirm your local wage and paycheck laws. 

Do you need guidance and want to ensure your company is compliant with both federal and state laws? BlueLion will help you determine whether you can and should charge employees for lost or broken property. We can also develop your policy if applicable, or help you figure out the next steps if deductions are not allowed. Contact our human resources experts today at 603-818-4131 or info@bluelionllc.com to learn more!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.

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