It is common for employees to separate from employment while still owing money to their employer. Such indebtedness can be generally attributed to a variety of causes, which can be broken down into three categories:

  1. Overpayment: A mistaken overpayment of wages or commission; adjustments to commissions; cash advances; loans; vacation advances before accrual; payment for classes; or personal purchases charged to the corporate credit card
  2. Retention of Property: Failure to return equipment such as a laptop or uniforms
  3. Wrongdoing Causing Damage to the Employer: Damage to property; inventory or cash shortages; unauthorized extension of credit; or a violation of a work rule causing damage to the employer.— in the extreme, the employee engaged in criminal activity such as theft, embezzlement, or malicious destruction of property

Employers may be inclined to offset final employee pay by the amount that the employee owes or has damaged the employer. The belief that an offset is appropriate can be particularly strong when the employer’s published policies caution employees that the employer retains the right to deduct any indebtedness from wages or when the employer obtains the employee’s prior authorization to deduct any amount owed to the employer at the time of termination of employment. While this strategy may pass the fairness test (since the debt is often undisputed), such self-help measures are often prohibited, or at least regulated, by state law.

If an employer desires to deduct any amount from an employee’s earned wages, whether during employment or upon termination, it is important to review the laws of the state in which the employee is employed. The laws and regulations vary. For example, until recently, New York state had one of the most restrictive wage deduction laws in the country, which formerly prohibited deductions from employee wages even in cases where employees had expressly authorized the deductions immediately before they occurred. However, in response to significant outcry from the business community, Governor Cuomo signed a law passed last year by the New York Legislature significantly liberalizing allowable wage deductions. However, the law requires the New York Department of Labor to draft regulations fleshing out the parameters of the changes to the New York law, but these regulations have yet to issue. Furthermore, even in those states that permit wage deductions, some have limits and in all cases, the deduction cannot result in the employee being paid less than the minimum wage.

The upshot of this broad variance in state regulation of deduction from employee wages is that, before an employer makes such a deduction — even if it seems fair and even if the employee authorizes it — the prudent approach is to ensure the deduction is allowed in the relevant state.