PAGE 42 / NATIONAL CLOTHESLINE / JUNE, 2019 KEEPITLEGAL Rules regarding payroll deductions BYFRANKKOLLMAN R emember your first pay- check? Were you sur- prised to learn that there were deductions for fed- eral tax, state tax, and the Fed- eral Insurance Contributions Act (Social Security and Medicare)? In addition to these manda- tory wage deductions, employ- ers are frequently called upon to make other payroll deduc- tions, either for the benefit of the employee, the benefit of the company, or the benefit of a third party like a judgment creditor. The crux of the problem is that virtually every state has its own rules on non-manda- tory payroll deductions, which are also part of state wage pay- ment and collection laws. In most jurisdictions, if you fail to pay an employee wages that he or she is due, you can be sued for double or triple the amount you should have paid, plus attorneys’ fees. An im- proper deduction is considered a failure to pay wages when due. In addition, the federal Fair Labor Standards Act imposes restrictions on payroll deduc- tions, even if the deduction was proper under state law. The general rule is that non- mandatory deductions need to be authorized by the employee in writing to be valid. It is im- material that the employee owes you money (or may have even stolen money). A deduc- tion without written authori- zation in most instances is im- proper. There is nothing wrong with getting that written au- thorization long before it is needed, perhaps as part of the employee’s orientation, but a written authorization is the gold standard. Even with a written author- ization, some deductions are specifically prohibited by fed- eral and state law. Any deduc- tions that take an employee be- low the minimum wage can be problematic. If the employee is repaying a cash advance or paying his or her share of health insur- ance premiums, voluntarily, typically that is fine. If the de- duction is mandatory (for ex- ample, cash register short- ages), the deduction cannot take the employee below the minimum wage. Speaking of cash register shortages, some states specifi- cally prohibit deductions for shortages, breakage, and other employee negligence. You can fire an employee in those states for shortages or breakage, but you cannot make them pay for it. Check your state laws. Payroll deductions for salaried, exempt employees can run afoul of the Fair Labor Standards Act and cause a company to lose the exemption from overtime. As you know from previous columns, to be exempt, most employees must be paid a salary. If an improper deduc- tion is made, the Department of Labor takes the position that the employee has been con- verted to an hourly employee, and overtime must be paid. For example, if an exempt employee is called for one day of jury duty, he or she cannot have the day docked from his or her salary. The most you can deduct is the amount the em- ployee received from the court for the day, in many cases be- ing less than an hour of pay. You better also have written authorization to make that de- duction. The final paycheck One tricky deduction issue can be caused by a final pay- check. In most states, there are rules dealing with unused sick leave and unused vacation. If the employee has actually earned these amounts, he or she is usually entitled to be paid for the unused time. Some states will look at the ac- tual sick time and vacation pol- icy to determine if payment is required. Another issue can arise for commissions. Most employers hate to pay commissions to employees after they leave, so their commission policies re- quire the employee to be on the payroll when the commis- sion is to be paid. These policies are fre- quently found to be illegal — if the employee has done everything required prior to termination to earn the com- mission, the commission should be paid. If more work was needed to be done by another employee to complete the sale, commis- sions can be withheld depend- ing on the circumstances. But what if the employee is caught stealing? Can you with- hold that person’s final pay- check? Unfortunately, unless the employee agrees to the with- holding in writing, the answer is “no.” Pay them and file criminal charges. Typically, the prose- cutor will require restitution of the stolen amounts as part of any plea deal, or the court will separately order it. That is bet- ter than being sued for triple damages and having the state authorities claim that the thief was entitled to be paid under state law. Court-ordered withholding Sometimes, you will receive a court order to withhold money from an employee’s paycheck. For example, in most states, a person or com- pany with a judgment can gar- nish the wages of the person who owes them money. Tip: Do not ignore these or- ders, even if the employee no longer works for you. You must respond to the court if that is the case, and if the employee is due pay sub- ject to the garnishment, you must withhold the amount and send it to the creditor. Failure to do so makes the employer liable for the garnishment. If you have any questions about the legitimacy of the court order, contact the clerk’s office of the court. The clerks will normally be helpful. Do not ignore orders for child support or tax liens. Never assist your employee to avoid them. Again, if you doubt their authenticity, by all means do your footwork. Ignoring them, however, could cause liability for the amounts that should have been withheld. Further, read the orders be- cause they often tell you how to calculate the amount of the withholding. Fixing errors Payroll mistakes should be corrected as soon as possible. Some states even prescribe how long you have to correct an error. In any event, making sure that payroll mistakes are promptly corrected is a good business practice. Finally, if you use independ- ent contractors (normally a bad idea if they should, in fact, be treated like employees), de- ductions from their “contract payments” are not subject to payroll deduction restrictions. Nevertheless, if a so-called in- dependent contractor is found to be an employee, all these de- ductions will be subject to wage payment and collection laws, as well as the Fair Labor Standards Act. In sum, get it in writing, be mindful of the FLSA, know your state’s laws, do not ignore court and agency orders, and do not misclassify employees as independent contractors. The devil is in the details. The general rule is that non-mandatory deductions need to be authorized by the employee in writing to be valid. To learn more, see the Index of Advertisers on page 50 or visit Frank Kollman is a partner in the law firm of Kollman & Saucier, PA, in Baltimore, MD. He can be reached by phone at (410) 727- 4300 or fax (410) 727-4391. 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