Restaurants and other employers often question when they can lawfully deduct amounts from employee pay. The answer is difficult to ascertain because it can depend on a variety of factors, including whether the employee is exempt under the Fair Labor Standards Act (FLSA), in which state the employee is located, who benefits from the deduction, and whether the employee consents to the deduction. Of course, some deductions are not only permissible, they are required. But most deductions are either impermissible or permissible only in certain circumstances.
Employers are required to make certain deductions pursuant to applicable statutes and court orders. These deductions can include an employee’s portion of taxes and specified amounts pursuant to wage garnishments and child support orders.
Generally Permissible Deductions for Insurance Premiums and Employee Benefits
Employers generally may deduct for an employee’s voluntary contributions to certain insurance premiums and benefits payments, such as 401(k), retirement, and pension plan payments. Many states require employers to obtain written authorization from an employee before making these deductions.
FLSA Restrictions on Deductions from an Exempt Employee’s Salary
The FLSA’s restrictions on employee pay deductions depend on whether the employee is exempt from the FLSA minimum wage and overtime pay requirements. To be exempt, an employee must have certain duties (the “duties test”) and generally must be paid on a salary basis (the “salary basis test”), although some exempt employees are paid on a fee or other basis.
To meet the salary basis test for exemption, an employee must receive each pay period a predetermined amount as all or part of his or her compensation, and an employer cannot reduce the predetermined amount due to variations in the quality or quantity of the employee’s work. Subject to the specific exceptions enumerated below, an exempt employee must receive his or her full salary for all weeks in which he or she performs any work. The exceptions, pursuant to which an exempt employee’s salary may be reduced without violating the salary basis test, are only as follows:
- When the employee is absent for one or more full days for personal reasons other than illness or disability
- When the employee is absent for one or more full days for illness or disability if the deduction is pursuant to a policy of providing compensation for lost salary due to such illness or disability
- To offset amounts the employee receives for jury or witness fees or military pay
- For penalties enforced in good faith for employee violations of safety rules of “major significance”
- For suspensions of one or more full days enforced in good faith for employee violations of generally applicable, written workplace conduct rules
- For the first and final week of employment and weeks in which the employee takes unpaid leave pursuant to the Family and Medical Leave Act (employers may pay the pro rata portion of the employee’s salary during these weeks)
The Department of Labor (DOL) Wage and Hour Division takes the position that any other deductions from an exempt employee’s salary, such as deductions for cash register shortages or damage to or loss of company funds or property, violate the FLSA salary basis test.
An employer who makes improper deductions to an exempt employee’s salary jeopardizes that employee, and under certain circumstances other employees’, exempt status. Employers should ensure they have a clearly articulated policy that prohibits improper deductions and provides a mechanism for employees to report and complain of improper deductions. Such a policy can help an employer protect the exempt status of its employees if the employer reimburses employees for improper deductions, makes a good faith effort to comply with the FLSA requirements in the future, and does not willfully violate the policy after receiving employee complaints.
FLSA Restrictions on Deductions from a Non-Exempt Employee’s Pay
A non-exempt employee is entitled to minimum wage and to overtime pay for hours worked over forty in a workweek. Employers will generally violate the FLSA if they make deductions which reduce non-exempt employee pay below the minimum wage or overtime owed.
The wages owed under the FLSA must be paid to an employee unconditionally, or “free and clear.” That means employers will not meet their FLSA wage obligations for amounts an employee has to “kick-back” to the employer or pay to a third party for the employer’s benefit.
Most restaurants take advantage of the “tip credit” option under the FLSA for certain non-exempt employees and must be mindful not to violate the tip credit requirements by making unlawful deductions from employee pay or tips.
State and Local Restrictions
Even if the FLSA does not prohibit a particular deduction, employers must carefully review other federal, state, and local law requirements to determine if there are additional restrictions on employee pay deductions. Unfortunately, state laws on deductions vary considerably. A comprehensive review of all state requirements is beyond the scope of this article, but some general comments are provided below.
Many states’ statutes specify that deductions not required by law can only be made pursuant to a written authorization or agreement from an employee. Even if an employee consents, some states only allow deductions that benefit the employee. Some states expressly prohibit deductions for uniforms, cash and inventory shortages, walkouts and damage to or failure to return property; whereas other states only prohibit those deductions if they would cause an employee to receive less than minimum wage or if the deductions are made without the employee’s written consent.
The difficulty with deductions from employee pay is that employers must ensure they comply with all applicable federal, state, and local laws and those laws can vary significantly. For that reason, employers should seek the advice of counsel prior to making any deductions not mandated by law.