Say an employee slips $20 from the register and even admits to it when you show the camera footage. Or, more innocently, say an employee is overpaid $20 entirely by accident. If the employee refuses to give it back, should you deduct the $20 from the employee’s paycheck?
It depends. Here are four questions to ask yourself.
1. Is the deduction for theft or something else, such as accidental cash shortages?
Under the FLSA, employers in some instances may deduct money directly from the employee’s paycheck, notably for mistake or fraud. Surprisingly, this can be true even if the deductions reduce the employee’s net pay below minimum wage. See, e.g., Brennan v. Veterans Cleaning Serv., Inc., 482 F.2d 1362 (5th Cir. 1973) (en banc).
In Brennan, for instance, the Fifth Circuit stated that one of the “judicially recognized” exceptions to the FLSA is “repayment to the employer of amounts misappropriated by the employee” and that recovery by the employer “may be made by means of paycheck deductions, even where they reduce the net pay to the employee below minimum wage.” Id. at 1369. The Fifth Circuit has also explained that “where an employee has taken some money, has had the use of it, and is required to return it . . . . there would be no violation of the [Fair Labor Standards] Act because the employee has taken more than the amount of his wage and the return could in no way reduce his wage below the minimum.” Mayhue’s Super Liquor Stores, Inc. v. Hodgson, 464 F.2d 1196, 1198 (5th Cir. 1972); see also, Goulas v. LaGreca, No. 12-898, 2013 U.S. Dist. LEXIS 80368, at *27 n.3 (E.D. La. June 6, 2013) (“In the instant case, Services seeks to offset the overtime wages it owes to Goulas with other wages it actually paid to Goulas. This is clearly permissible under Singer and is not foreclosed by Martin.”); Chen v. Cayman Arts, Inc., 757 F. Supp. 2d 1294, 1301 (S.D. Fla. 2010) (“there are three judicially created exceptions, which allow paycheck deductions even when they reduce the net pay to below minimum wage” including when “the employee misappropriates the employer’s money”).
The U.S. Department of Labor (DOL) has at times adopted similar positions, depending on the reason for the deduction. In 2004 for instance, it stated that in some cases, certain overpayments or loans “may be deducted from the employee’s earnings even if such deduction cuts into the minimum wage or overtime pay due the employee under the FLSA,” as long as no administrative charges are assessed. See U.S. Dept. of Labor, Wage and Hour Division Opinion Letter, FLSA2004-19NA (Oct. 8, 2004).
However, the reason for the deduction is important. While the FLSA does not preclude deductions for intentional misappropriation, the DOL prohibits deductions for cash drawer shortages that appear accidental rather than intentional, or for certain types of reimbursements or job-required costs. See, e.g., U.S. Dept. of Labor, Wage and Hour Division Fact Sheet #16. Further, pay for exempt employees should not be deducted except as specifically allowed by applicable laws.
2. What are the applicable state laws, if any?
Though the FLSA allows direct deductions in some cases of theft or mistake, employers must also check state law, which varies widely on this issue. On one hand, states like Georgia do not require any type of disclosure or permission to deduct from paychecks (except for union dues) while others, such as California, generally prohibit paycheck deductions even in the case of overpayment or cash shortages. See O.C.G.A. § 34-6-25; Cal. State Employees’ Ass’n v. California, 198 Cal. App. 3d 374 (1988).
However, most states fall somewhere in the middle. Minnesota, for instance, prohibits paycheck deductions for “stolen property” unless the employee agrees or the employer has a court order. See Minn. Stat. § 181.79. Others, like Oklahoma, generally allow deductions but require a written agreement. See O.A.C. § 380:30-1-7(d).
If a deduction is permitted under all applicable laws, employers are wise to obtain a written agreement or acknowledgement which includes a release, even if one is not required.
3. Is litigation worth it?
Even where an employer is permitted under applicable laws to deduct the stolen funds directly, if the employee’s paycheck dips below minimum wage on its face, the employee has a colorable claim under the FLSA and litigation may ensue. Though the employer may have had the legal right to deduct the pay, it would still need to develop these facts, participate in litigation, and move for a judgment on the merits to prevail. In all, the cost of litigation could greatly exceed the original amount in dispute.
4. What are my options to recover the overpaid or stolen amounts besides deducting from the employee’s paycheck?
Employers can almost always pursue recovery in civil courts. See, e.g., Baylor v. General Anesthesia Servs., 2006 U.S. Dist. LEXIS 59542, at *8-9 (S.D. W. Va. Aug. 8, 2006) (“Courts generally have no difficulty in granting recovery of compensation paid to an employee under mistake of fact unaffected by fraud. In fact, courts grant recovery in this situation—whether the mistake is exclusively the employer’s or a mutual one—‘almost as a matter of course and without extended discussion.’”).
Though not always ideal or cost-effective, for various reasons, some employers occasionally pursue this option. Even in cases of overpayment, some states have causes of action that would make the employer whole. Georgia, for instance, recognizes a claim for “money had and received” for cases of overpayment. See, e.g., O’Berry v. Cooper, 202 Ga. App. 97, 99 (Ga. Ct. App. 1991) (employee who failed to notify or reimburse pension plan administrators for overpayment was liable for money had and received because he had a duty not to act in a manner to deceive and mislead).
Depending on the amount and circumstances, employers also ought to consider reporting theft to their insurers or law enforcement, which can sometimes assist with restitution. Of course, employers can also try to work out a repayment plan with the employee, if circumstances permit. Depending on the amount of money at issue, this approach may be more feasible for the employee and a way for the employer to avoid more costly steps like litigation. That assumes, of course, that the employee is still employed.
Whether you should deduct that $20 from your employee’s paycheck depends on a number of considerations including applicable laws and your tolerance for risk. While this post is intended to be a general overview of a certain type of deduction, wage and hour is among the most complex areas of employment law, and each situation is different.