In an opinion letter dated January 10 2010 the New York State Department of Labour stated its position that employers cannot deduct from an employee's wages amounts owed by the employee to the employer, including for overpayments or repayment of a loan, even with the employee's written authorisation.

Section 193 of the Labour Law, entitled "Deductions from wages", prohibits deductions from wages, except those which are "made in accordance with the provisions of any law or any rule or regulation issued by any governmental agency" or which:

"are expressly authorized in writing by the employee and are for the benefit of the employee, provided that such authorization is kept on file on the employer's premises. Such authorized deductions shall be limited to payments for insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization, and similar payments for the benefit of the employee."

The applicable Labour Law regulations (Section 195.1 of Title 12 of the New York Codes, Rules and Regulations) limit permitted deductions for non-enumerated "similar payments for the benefit of the employee" to 10% (in aggregate) of the gross wages due to the employee for a payroll period.

Relying on the language in two cases decided by the New York Court of Appeals several years ago, the department opined that there are only two categories of payment that may be considered "similar payments for the benefit of the employee": (i) 'monetary payments', meaning investments of money for the later benefit of the employee (eg, deductions for insurance premiums, pension or health and welfare benefits and payments for US bonds); or (ii) 'supportive payments', meaning that the wages are used by someone other than the employee or employer to support some other purpose of the employee (eg, contributions for charitable organisations or payments for dues or assessments to a labour organisation).

The opinion letter stressed that deductions, such as repayment of a personal loan or overpayment, that are paid directly to the employer or its subsidiary "violate the letter of the statute and the policy underlying it" and thus are not permissible.

The opinion letter also addressed the employer's options to recoup from an employee overpayments and other payments that may not be deducted from wages. Section 193 of the Labour Law prohibits employers from "requir[ing] an employee to make any payment by separate transaction unless such charge or payment is permitted as a deduction from wages". In interpreting this provision, the department stated its view that an employer could not induce or request an action by the employee which, if refused, could result in disciplinary action or retaliation action. Therefore, according to the department, an employer may ask that the employee separately repay the sums owed to it, provided that the employer also clearly communicates that the employee's refusal will not result in any disciplinary or retaliatory action. The department clarified that while an employer may not require repayment under the threat of discipline, employers may seek relief in a separate proceeding against the employee.

Thus, according to the department, an employer may not deduct from wages amounts owed to it by an employee and may request the repayment of such sums only if it clearly communicates that the employee's refusal to repay the debt will not result in any adverse action being taken against it. If the employee refuses to repay the sums owed to the employer, the employer's only recourse is to file a proceeding against the employee. Given the department's position, employers should reconsider their use of loans and advances to employees.

For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (kleblang@kramerlevin.com or rholtzman@kramerlevin.com).

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