To quickly process payroll, employers oftentimes pay hourly employees for an assumed amount of hours before their actual timesheets are submitted. For example, an employer may issue a paycheck every Friday for an assumed 40 hours before actually receiving the employee's final timecard for the week. If it turns out that the employee worked less than 40 hours in the week, then the employee has been overpaid. May the employer recover the overpayment by taking a deduction from the next paycheck? In a November 25, 2008 advice letter, the Division of Labor Standards Enforcement (DLSE) concluded that – in general – an employer may lawfully recover wage overpayments in this circumstance. However, as with many issues related to California wage and hour law, several conditions and potential pitfalls exist. The DLSE highlighted the following in its letter:

The Deduction Must Be Explicitly Authorized by the Employee In Writing: Pursuant to Labor Code section 300, the DLSE explained that an employer may recover for an overpayment of wages only if the employee has specifically and voluntarily authorized the deduction in a signed writing that is completed before the deduction takes place. Moreover, the DLSE made clear that the mere submission of a timesheet which reflects less hours than the employee was actually paid does not qualify as a written authorization unless the timesheet "expressly and voluntarily authorizes a specific prospective deduction."

The Employer May Not Take Any Deductions from the Employee's Final Paycheck: The DLSE stated its opinion that no deduction of any sort may ever be taken from an employee's final paycheck. The DLSE also noted that if such a deduction is made, the employer would be liable for "waiting time" penalties of up to 30 days pay under Labor Code section 203. Please note, however, that given the case law on this subject, the DLSE's opinion in this respect is open to debate. It may be permissible to take a deduction from a final paycheck so long as the employee voluntarily signs a new writing authorizing the specific deduction before it occurs.

The Deduction Cannot Cause The Employee to Earn Less than the Minimum Wage: If the deduction taken would cause the employee to earn less than the minimum wage for the hours he or she worked in the pay period, then the total deduction may not be taken. The employer can only take an amount that would keep the employee's wages at no less than the legal minimum.

As the DLSE's letter makes plain, taking deductions from employee paychecks is subject to special rules. By no means were all of these rules discussed by the DLSE in its November 25, 2008 advice letter. Therefore, extreme caution should be used whenever attempting to recover a wage overpayment. Please contact us if you require further assistance or explanation.