Recovering Money From Employees Without Violating the FLSA
On June 4, the U.S. Department of Labor Wage and Hour Division announced that a San Antonio-based car wash company has paid $246,438 in back wages to 308 employees following a DOL investigation. Among other things, the DOL found that the company had taken illegal deductions from employees paychecks for items including uniforms, insurance claims, and cash register shortages that resulted in employees' pay falling below the federal minimum wage.
It is not unusual for employers to seek to recover money from employees through paycheck deductions for items such as uniforms, shortages, lost tools, and damage to vehicles or other property. So what kinds of debts can employers recover from employees, and how do they do so without running afoul of wage and hour laws?
One option would be to engage the services of someone such as the gentleman in the photo, but that approach may involve legal complications well beyond the wage and hour issues we will discuss here. So, here are some general guidelines:
Generally, Employees Must Receive At Least Minimum Wage "Free and Clear"
The basic requirement of the FLSA is pretty simple: employees must receive at least the minimum wage for all hours worked in the workweek. So, an employee who works 40 hours must receive at least $7.25 per hour, or $290. (If your state or municipality sets a higher minimum, that will apply.)
That $290 must be paid to the employee "free and clear," with limited exceptions:
- Employers obviously may (and in fact must) deduct employees' share of taxes from their gross pay. They may not, however deduct the employer share of any tax.
- Employees may authorize deductions to be turned over to third parties, such as union dues, insurance premiums, and voluntary contributions to charitable, athletic and social organizations.
- Employers may also deduct sums to pay a creditor of the employee under a lawful garnishment order, wage attachment, trustee process, or bankruptcy, so long as the employer derives no profit or benefit from the transaction.
Certain "Facilities" Can Be Credited Toward Wages
In addition to the deductions permitted above, employers can count the reasonable cost of board, lodging, or other facilities toward an employee's pay if such items are customarily furnished to employees. Certain conditions must be met for an employer to take a credit for such items, including:
- Only the "reasonable cost" of items may be charged to the employee. This may not include any profit or benefit for the employer or any affiliated person, and the employer should be prepared to show evidence that the credit taken is consistent with the employer's reasonable cost. Simply setting an estimated price - for example, taking a meal credit for restaurant employees of one half of the regular retail price of the meal - will not suffice absent evidence that the price charged reflects the employer's actual costs. Keep those receipts.
- The items provided must be primarily for the benefit of the employee rather than the employer. For example, if an employer provides lodging to an employee because it requires the employee to be on call at the employer's behest, the employer may not be able to take any credit for the cost of the lodging.
- The employee must actually receive the benefits of the facilities furnished. For example, no credit can be taken for meals not actually provided to an employee.
- The DOL's regulations provide that the employee must voluntarily accept the facilities furnished by the employer. However, several court decisions have declined to enforce that part of the regulations, finding it inconsistent with the language of the FLSA. (See, e.g., Davis Bros. Inc. v. Donovan, 11th Cir. 1983).
Employees Can't Be Required To Pay For Items That Primarily Benefit the Employer
As a general rule, employers cannot require employees to pay the cost of items that are primarily for the benefit of the employer if doing so would reduce the employee's wages below the required minimum wage and overtime pay. This is so whether an employer deducts the cost of such items from the employee's pay, requires employees to reimburse the costs, or requires employees to pay the costs directly. Items that the Department of Labor regards as being for the benefit of the employer include:
- Tools and materials incidental to carrying on the employer's business
- Uniforms, uniform rental, laundering
- Register shortages
- Damage to the employer's property
- Financial losses due to customers not paying bills
- Economic losses due to employee negligence
- Employer-mandated physical exams
(See the DOL's fact sheet for examples of these sorts of expenses.)
Bottom Line for Employers
In light of the restrictions above, employers as a general rule should not take any deductions from employee pay or require employees to pay costs that would reduce their pay below the required minimum wage and overtime payments. However, if an employee's pay exceeds the required minimums, an employer may spread payments out over time so long as the employer receives at least the minimum wage and required overtime for all hours worked.
Employers should also take note that federal law is not the only issue here: many states also restrict wage deductions, so be sure you understand the wage payment laws and regulations that apply to your location before you take any deductions. (In Illinois, employers need to comply with the Illinois Wage Payment and Collection Act and the regulations issued by the Illinois Department of Labor.)