Employer Deductions to Paychecks for Overpayments or Loans
Mistakes are often made on paychecks. When an employer overpays an employee, it may not deduct the amount of the overpayment from the employee's next paycheck without the employee's consent, and may never do so on the employee's last paycheck.
Overpayments and Employer loans to EmployeesAn employer may make deductions from wages to reflect predictable and expected wage overpayments made in the immediately prior paycheck that resulted from the employer’s payroll system, or for repayment of a loan, if the employee provides voluntary, written authorization. An electronic time sheet does not constitute a voluntary, written authorization. Further, an employer may not make deductions from a final paycheck to reflect prior overpayments made; such action would subject the employer to section 203 penalties. DLSE Op. Ltr. 2008.11.25-1.
Deductions from an employee's final paycheck for debts owed to the employer are prohibited, even with prior written authorization. Barnhill v. Saunders (1981) 125 Cal.App.3d 1. In Barnhill, the employer deducted the balance of a loan from a discharged employee's final paycheck. The court concluded that "an employer is not entitled to a setoff of debts owing it by an employee against any wages due that employee" on the employee's final paycheck.
Even an erroneous overpyament may not be recouped by the employer without the employee's written consent. In California State Employee's Assn. v. State of California (1988) 198 Ca1.App.3d 37, the employer made numerous overpayments to hundreds of employees. The employer notified the affected employees that it planned to make monthly deductions from their salaries to recoup the overpayments. The employer did not have the employees' signed authorizations to make these deductions, and the court held that the employer's deduction of the overpayments was unlawful.
The DLSE takes the view that periodic deductions from wages authorized in writing by an employee to recoup predictable, expected overpayments that occur as a consequence of payroll practices do not run counter to these cases. This makes sense, but employee authorization is critical to permitting such deductions. Labor Code §224 provides that a deduction “not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to wage agreement or statute" that is authorized in writing by the employee does not violate the prohibition in Labor Code §221 against unlawful collection of wages. The DLSE has opined that a deduction for previous overpayment of wages is not unlawful if there is a previous written agreement, and that after making the deduction, the employee still receives no less than the minimum wage for all hours worked in the pay period. (DLSE Op. Ltr. 1999.09.22-1)
The bottom line is that an employer needs its employees' written authorization to recoup an overpayment or an employer loan from its employees' subsequent wages, and may never do so on an employee's final paycheck.
GarnishmentIt is extremely important to understand that the rules governing how an employer can recover an overpayment or a loan from an employee do not apply to a garnishment order. An employer who is properly served with an order garnishing an employee's wages must withhold them pursuant to the garnishment order. This is true even if the garnishment order is related to a debt owed by the employee to a prior employer.
Both employers and employees need to understand that garnishment orders stand on their own, and are not subject to the limitations discussed in this guide with respect to an employer's efforts to recoup an overpayment or loan from an employee on subsequent paychecks.