Wage Deductions: The Right and Wrong Way
The threat of docking pay may be a common one that employers use when faced with employee misconduct or policy violation. Unfortunately, deducting wages from an employee’s paycheck is a highly regulated proposition. The number and types of appropriate deductions are very limited. Most deductions follow exceptions under the federal Fair Labor Standards Act (FLSA). They include:
- Costs for furnishing board and lodging;
- Costs for tools and uniforms;
- Deductions authorized by the employee (i.e. union dues) or required by law (i.e. taxes);
- Reductions in a fixed salary if the employee fails to worked the full schedule; and
- Disciplinary reasons.
In addition, the Texas Payday Law prohibits an employer from withholding any part of an employee’s wages unless:
- A court order requires the deduction;
- The deduction is authorized under federal law (i.e. income taxes);
- The deduction is authorized under Texas law (i.e. child support);
- The employee has authorized the deduction in writing.
Child Support Withholding
One of the most common types of wage deduction is for court-ordered child support. When an employer receives a wage withholding order, it must begin withholding the ordered amount no later than the date of the next full pay period following receipt of the order and must continuing withholding the deduction until it receives another order from the court or the employee ceases employment.
Additionally, the employer may not withhold more than 50 percent of the employee’s “disposable earnings” even if the withholding order calls for a larger amount. “Disposable earnings” is defined under the Texas Family Code as “the part of earnings of an individual remaining after the deduction from those earnings of any amount required by law to be withheld, union dues, nondiscretionary retirement contributions, and medical, hospitalization, and disability insurance coverage for the [employee] and the [employee’s] children.”
An employer may request a hearing to contest a withholding order, but this is typically only done when there is clearly an error with the order. For example, the company receives an order for an individual who is not an employee.
Failure to deduct the appropriate child support could be quite costly for the employer. Damages include:
- The amount supposed to be withheld;
- Attorney’s fees and court costs for the party seeking to enforce the order; and
- Up to $200 per occurrence.
Disciplinary Withholding
When considering to dock an employee’s pay related to violation of policy or damage to company property, there are a number of factors which should weigh into the employer’s decision. First and foremost, unless there is a written agreement otherwise, an employer may not deduct wages from a non-exempt employee that the employee has already earned. However, an employer may reduce the hourly wage a non-exempt employee is paid based on policy violations, so long as the hourly rate does not fall below the minimum wage.
Exempt employees usually are paid salaries, and any reduction to those salaries must comply with the FLSA regulations — otherwise, the employees’ exempt status will be jeopardized. Under 29 C.F.R. 541.602, deductions from exempt employees’ pay can be taken for disciplinary suspensions, but they must be made on a fullday basis only.
The Wage and Hour Division of the U.S. Department of Labor has provided guidance on the applicability of docking exempt employee’s wages under a disciplinary policy. Specifically, in response to frequently asked questions, they said:
Are there any types of pay deductions that an employer may impose to discipline an employee?
An employer may only dock an exempt employee’s pay for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those related to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries or coal mines. A deduction from pay as a penalty for violating a safety rule of major significance can be made in any amount.
Under what circumstances can an exempt employee be suspended without pay?
An employer may impose in good faith an unpaid suspension for infractions of workplace conduct rules, such as rules prohibiting sexual harassment, workplace violence or drug or alcohol use or for violations of state or federal laws. This provision refers to serious misconduct, not performance or attendance issues. The suspension must be imposed pursuant to a written policy applicable to all employees.
How long can an exempt employee be suspended without pay for disciplinary reasons?
Deductions from the pay of an exempt employee may be made for suspensions of one or more full days imposed in good faith for disciplinary reasons for infractions of workplace conduct rules. Such disciplinary deductions may only be made in full day increments.
What kind of notification does the exempt employee have to receive regarding a disciplinary suspension?
The employer must have a written policy applicable to all employees in place prior to imposing a disciplinary suspension.
Courts interpreting the FLSA rules, however, have ruled that if an employer routinely makes salary deductions of less than a full week for disciplinary reasons or has an employment policy that creates a significant likelihood of such deductions, the salary requirement is not satisfied and the employee is not exempt from the FLSA. See Auer v. Robbins, 519 U.S. 452 (1997).
Under FLSA rules, an employer must pay an exempt employee his or her full salary in any week in which the employee performs any work, regardless of the number of days or hours actually worked. However, an employer may reduce an exempt employee’s salary under the following circumstances:
- Time actually worked during an employee’s first or last week of employment.
- Full days off for personal reasons. Partial days are not applicable.
- Full days off for sickness or disability if the employee is covered under a bona fide plan, policy, or practice which covers sickness or disability pay or if the employee is receiving wage benefits under state workers’ compensation laws.
- Unpaid leave under applicable Family and Medical Leave Act rules.
- If the employee receives pay for jury duty, as a witness, or temporary military leave, the employer may offset the daily wages by the amount of pay received.
Employer To-Do List
As with most employment related issues, best practice is to have a written policy which outlines which deductions are expressly permitted and those which are prohibited. In the policy, the employer should articulate a complaint or notification procedure so employees have a method for raising potential prohibited deduction to the employer’s attention.
Not only will a written policy inform employees of the process, it may mitigate potential fines if the Department of Labor investigates. If the Wage and Hour Division examines an employer’s deduction practices, it will look at whether the employer has an actual practice of making improper deductions. Having a policy will show attempted compliance with the law. Additionally, DOL regulations provide a safe harbor for employers who have a clearly communicated policy including a complaint procedure. Employers who have a policy will not lose the exemption if they take the following steps after receiving an employee complaint:
- reimburse the employee(s) for the improper deductions,
- make a good faith commitment to comply in the future, and
- refrain from willfully violating the policy by continuing to make the improper deductions.
The regulations explain that the best evidence of a clearly communicated policy is a written policy distributed to employees. See the Department of Labor sample policy here.