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Can I Just Take It Out of Their Paycheck?

When it comes to dealing with damage to, or loss of, company property, business owners regularly ask whether they can pass that expense on to the employee. Making incremental deductions from an employee’s paycheck, or requiring reimbursement in another form, could expose a business to liability, even if the employee agrees to pay for the loss or if the loss could have easily been prevented. Instituting a policy of charging employees for preventable accidents, damaged equipment, unreturned property, poor work quality, or cash shortages, for example, requires careful evaluation because state laws regarding wage deductions vary widely.

Under the Federal Fair Labor Standards Act (FLSA), employers may deduct from wages for loss or damage if two conditions are met:

  • Employee must sign a written statement agreeing to the deduction before money is taken from his or her paycheck and;
  • Deduction must not bring the employee's hourly rate below the minimum wage or violate overtime requirements.

According to the Department of Labor, deduction policies pertaining to reimbursement for damage to, or loss of, company property may only apply to non-exempt employees; deducting from the wages of a salaried overtime exempt employee for the same or similar reasons may run afoul of the FLSA. Many states’ laws add additional requirements and specifications to the federal standard. For example, in California, deductions can only be made for cash shortages, damage and loss if an employee acted with gross negligence or through a dishonest or willful act, while in Kansas, Montana, New Jersey, and Rhode Island, employers are prohibited from charging employees for mistakes.

Additional final paycheck laws apply when an employer delays, withholds, or makes deductions beyond what is allowable from a final paycheck. The FLSA mandates that wages are due on the next regular payday for the covered pay period, and several states lay out additional requirements for employee payment upon termination. Final paycheck laws also vary widely by state and often have clear provisions that are more restrictive then federal guidelines.

Cost benefit analysis of maintaining a payroll deduction policy should be considered. Even if applicable laws do not prohibit making a certain type of deduction, charging employees for accidents and mistakes may negatively affect recruitment efforts, employee morale and turnover, or even expose the company to discrimination lawsuits if the deduction policy is not applied consistently to all employees.

State and federal laws hold a high standard for the permissibility of payroll deductions because employee mistakes are generally viewed as a cost of doing business. Appropriate employer options for handling these situations include disciplining the employee when poor performance results in damage or loss, immediate termination when willful or intentional misuse of company property results in significant loss, involving law enforcement where there is criminal conduct, and/or pursuing the employee in civil or small claims court for loss or damage.

When creating a payroll deduction policy, or making a payroll deduction, particularly for employee mistakes, employers would be wise to consult with a human resources professional or knowledgeable employment attorney to ensure compliance. In order to mitigate risk and avoid company liability, it is important to verify that the plain language of a written policy does not conflict with the law, and that payroll deductions are permissible and proper.

Modern Business Associates is a HR outsourcing company offering flexible, cost-efficient solutions for payroll, tax accounting, benefits administration, risk management and HR consulting. If you would like more information about how the experts at MBA can help your business operations, please email us at or call (888) 622-6460 or visit

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