Deducting the Cost of Lost Equipment from an Employee’s Pay

Can you deduct the cost of lost equipment from your employee’s pay?  As a business owner I’m betting that on more than one occasion you have had an employee who has lost his company provided cell phone more than once and you’ve have to replace it.   Perhaps you want to recover the cost of the phone via a payroll deduction – before you do, read the rest of this great article from HR Matters E-Tips, because the answer depends first on state and federal restrictions and second on how much you want to deduct.

Both federal and state laws limit the deductions employers can take from their employee’s wages.  The federal Fair Labor Standards Act (FLSA), which requires minimum wage payments and premium overtime pay for covered employees, prohibits deductions from pay if they would reduce a nonexempt employee’s pay below the required minimum wage.  In addition, deductions may not affect the employee’s overtime pay.  So, in weeks that overtime is worked, deductions are limited to the same amount an employer may deduct if the employee had worked only 40 hours or less.  (Note, however, deductions for board, lodging and “other facilities” [i.e., items similar to board or lodging] may be made even if they bring an employee’s compensation below the minimum wage, as long as the deduction does not exceed the reasonable cost of these items. “Other facilities” may include meals furnished at company restaurants, dormitory rooms furnished to student employees, merchandise furnished at company stores, fuel, and electricity.)

If the employee is exempt, you have to be even more careful under the FLSA. Deductions from the salaries of exempt employees may violate the salary basis test and jeopardize their exempt status. For an employee to be considered exempt from the FLSA’s overtime pay requirements, the employee generally must be paid on a “salary basis,” in addition to meeting certain job duty requirements. The term salary basis means that the exempt employee is paid on a weekly or less frequent basis a predetermined amount constituting all or part of compensation, without reductions for variations in the quality or quantity of the work performed and without regard to the number of days or hours worked. So, for example, according to a Wage and Hour Administrative Opinion Letter (dated 3/10/06), an employer policy that required deductions from the salaries of its exempt employees to pay for the cost of lost or damaged tools or equipment issued to them could violate the salary basis requirement because it would result in impermissible reductions in compensation based on the quality of the work performed, contrary to the FLSA exemption regulations found in 29 C.F.R. §541.602(a).

You also should check your state law since many states have even more restrictive laws protecting employee wages. Virtually all states limit the deductions that can be taken from an employee’s paycheck to those which are required by federal or state law or court order, or to those authorized in writing by the employee. With respect to employee-authorized deductions, many state statutes (such as Michigan’s) are broadly worded and do not limit or describe specifically the types of deductions that can be made. Other states, like New York, specify which deductions are allowed (generally, those which benefit the employee, such as insurance premiums, retirement plan contributions, and savings plans) and stipulate that any other form of deduction violates the law.

California permits withholding when authorized by federal or state law or by the employee for insurance, medical, health and welfare, or pension plan contributions. California employers, however, many not deduct for any cash shortage, breakage, or loss of equipment unless it can be shown it was caused by the dishonest or willful act or gross negligence of the employee. Illinois specifies deductions for inventory shortages, financial loss, cash advances, equipment, improper credit card transactions, and property damage as appropriate only if there is a written authorization “freely given” at the time of the deduction. And, Wisconsin allows deductions for faulty workmanship, lost or stolen property, or damage to property only with the employee’s written authority or if the employer and the employee’s designated representative determine that the faulty workmanship, loss, or damage was the result of the employee’s negligence or willful conduct. Since state laws vary, you should consult the applicable state statutes before making any wage deductions.

As you can see, this situation isn’t as easy (or perhaps as legal) as you thought it might be.  Make sure that you do the proper checking at both the Federal and State levels – or consult an attorney for advice.  

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