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One of the most common questions we hear from employers involves when they can or can’t dock employees’ paychecks. It’s very tempting to use an employee’s paycheck as a way to recoup losses you’ve incurred because of her actions, especially when, as a practical matter, there will never be any other way to collect the debt from her. However, you should exercise caution when docking an employee’s paycheck because federal and state laws limit the deductions that can legally be made.
The federal Fair Labor Standards Act (FLSA) presents numerous potential pitfalls in the area of paycheck deductions. First and foremost, you should be very careful in making any deductions that would take a nonexempt employee below the required minimum wage based on the number of hours he worked during the pay period. There are certain deductions you can legally make even if they take the employee’s pay below minimum wage (e.g., for benefits, garnishments, pay advances, and a few other things). But the list of permissible subminimum wage deductions is limited, and you must make sure your intended deduction is on the approved list or you could be cited for minimum wage violations.
Salary deduction dilemmas
Your options for taking deductions from the pay of salaried exempt workers are even more limited under the FLSA. To qualify for the exclusion from overtime under most exemptions, an employee must be paid on a “salaried basis.” That means the employee’s pay isn’t subject to any reductions based on the quality or quantity of his work. So, with very few limited exceptions, you shouldn’t dock the pay of a salaried exempt employee because he misses work―especially when he has partial-day absences.
But that also includes deductions for missing or damaged equipment, or other circumstances in which the employee’s conduct has led to a financial loss for the company. The U.S. Department of Labor (DOL) has stated that these kinds of deductions aren’t on the “approved” list, so they generally aren’t permissible. If you make illegal deductions from a salaried exempt employee’s pay, you may lose the right to claim the exemption and thus have to pay overtime to the employee (or, if you have a general policy, other employees subject to similar deductions). That isn’t a situation you want to put yourself in, so if you plan to dock the pay of a salaried exempt employee, make sure the proposed deduction is in a category specifically authorized by the DOL.
On the other hand, if a salaried exempt employee misses work, you can dock any accrued paid leave, even for partial-day absences. That’s because accrued paid leave (sick pay, vacation, paid time off, or what have you) isn’t the same as “salary” in the eyes of the DOL. But be careful. If you have a salaried exempt employee who doesn’t have any accrued leave left to dock, you must refrain from cutting into her salary for the pay period, except in certain circumstances described in the regulations.
A final word on local laws
Each state imposes its own limitations on wage deductions, so be sure to check the law in any jurisdiction where you have employees.