Wage deductions and garnishments
The circumstances under which an employer may deduct wages from an employee’s paycheck are limited. With the exception of standard payroll tax deductions, the law generally prohibits an employer from deducting any wages from an employee’s paycheck. This report sets forth the limited situations in which an employer may deduct wages from an employee’s paycheck and provisions employers need to be aware of before withholding money from an employee’s pay.
A common question among restaurant employers is whether they can make their servers pay for errors in tallying guest checks. California’s Industrial Welfare Commission states that an employer cannot deduct wages or require reimbursements from employees due to cash shortages unless the employer can prove that the “shortage, breakage or loss [was] caused by the dishonest or willful act, or by the gross negligence of the employee.”
The California Supreme Court reasoned that some cash shortages and breakage or loss of equipment are “inevitable” in any business. An employer is usually better suited to bear such costs or expenses because the employer can pass these costs on to others by raising prices or lowering the wages of its employees proportionately. An employee has no way of dealing with this loss, other than paying for the loss out of his or her own pocket. Therefore, the court confirmed that an employer could only deduct an employee’s wages for cash shortages if the employee’s dishonest or willful conduct, or gross negligence, caused the shortage.
Accordingly, when determining whether to deduct wages from an employee’s paycheck for either dishonesty or willful misconduct or gross negligence, an employer must be extremely careful. Employees who make simple mistakes (for example, adding totals incorrectly, using wrong prices or leaving items off the totals) may deserve to be disciplined, but such errors do not entitle the employer to collect the loss from the employee. Even if the employee is completely at fault, if the error does not rise to the level of willful dishonesty, misconduct or gross negligence, then the loss is considered the employer’s cost of doing business. Furthermore, the Division of Labor Standards Enforcement (i.e., the Labor Commissioner) takes the position that an employer may not deduct from an employee’s final wages under any circumstances in the absence of a written authorization.
NOTE: This remains true even if employees sign an agreement saying that they will cover their errors by allowing the employer to deduct money from their wages.
According to an administrative opinion from former Labor Commissioner Lloyd W. Aubry, Jr. “Prior authorization will not be recognized by this Division … Employees should not as a condition of employment be required to sign wage deduction authorizations that are contrary to their interests based on these court decisions.”
Not only can an employer face lost wages and waiting time penalties for improperly withholding wages, but he or she can also face charges for defamation or slander for accusing an employee of committing gross negligence or dishonesty.
Hot to protect the business
Employers can gain some measure of protection by establishing reasonable rules and holding employees accountable for following them. For instance, an employer may require servers to obtain the manager’s approval before cashing a check. If the employee refuses to do so, he or she may be liable if the check bounces. Or, the employer may require servers to tally all checks on adding machines conveniently placed at wait stations. Employees who make mistakes on checks because they refuse to use the adding machines could be held liable. Employers also have the option of disciplining employees who do not follow company procedures. Remember, however, that simple errors are still protected: the employee who makes a mistake while using the machine as required (for example, by hitting the wrong key) may not be held financially responsible.
Some restaurants attempt to make employees more careful with guest checks by establishing individual server banks. But if employees are compelled to cover inadvertent shortages from their own funds or tips, the practice runs afoul of the law.
Businesses covered under the federal Fair Labor Standards Act are prohibited from making deductions from an employee’s wages for any reason if such a deduction would reduce the employee’s pay to below minimum wage. Furthermore, employers may not require tipped employees to pay for such losses from their tips.
Credit card fees
Operators often ask what to do if they pay out a charged tip to an employee and then discover that the credit card company will not honor the card and charges the total back to the operator.
In 2000, California adopted a law prohibiting employers from deducting credit card fees from employees’ tips that were charged by customers. (NOTE: The law also requires employers to pay employees’ charged tips no later than the next regularly scheduled payday.)
The rationale behind this law is that the employer is the one who makes the decision to accept credit cards, not the employee. Therefore, the employer must bear the costs for doing so. If the employee followed proper procedures in accepting the card, the employer cannot reclaim the charged tip from the employee, even if the card company charges back the total.
Handling zero paychecks
Food service operators with tipped workers often encounter the following dilemma: employees become so diligent about reporting their tips that their paychecks become too small to cover the payroll taxes they owe. To avoid liability for the unpaid taxes in this situation, employers have to file certain forms with the Internal Revenue Service (IRS) and California’s Employment Development Department (EDD).
As a reminder, under federal law requires employees must report their tips for any one month by the 10th of the month after the month they received the tips. No report is required for months when an employee receives less than $20 in tips. An employer must withhold income tax, the employee’s share of the FICA (social security) tax, and employee Medicare from these tips. The employee is liable for unemployment insurance, employment training tax, personal income tax and State Disability Insurance (SDI) on tips of $20 or more per month that are reported to the employer.
The IRS has provided specific instructions for handling tax withholding in the event one or more of your employees’ wages for the month are not enough to cover all of the taxes the employee owes. Those guidelines are located online at: http://www.irs.gov/taxtopics/tc761.html
For state taxes, the EDD has created an Information Sheet to help you navigate this issue. It is available here: http://www.edd.ca.gov/pdf_pub_ctr/de231t.pdf. The EDD suggests that you provide the employee with a form DE 370—“Statement of Amount Due from Worker.” Completion of the DE 370 or similar statement relieves the employer of the uncollected employee liability. (NOTE: This form can be found at http://www.edd.ca.gov/Payroll_Taxes/Forms_and_Publications.htm.) The DE 370 must be issued in quadruplicate and distributed as follows:
- Original and one copy to the worker
- Second copy is to be attached to the Quarterly Contribution Return and Report of Wages (DE 9) and sent to EDD
- Third copy to be retained in the employer’s records
For both State and Federal questions of tax withholding, we encourage you to work with your tax professionals to ensure compliance.
Handling wage garnishments
Wage garnishments must be handled carefully. Failure to garnish an employee’s wages properly could leave the employer responsible for the full amount of the claim, along with interest, costs and penalties. Keep the following points in mind:
- It is illegal to discriminate against an employee or refuse to hire someone whose wages have been garnished.
- An employer may deduct $1.50 from the employee’s earnings as an administrative fee for each payment made in accordance with any garnishment order.
- A paycheck may not be garnished for more than 25 percent of its total (or 50 percent in the case of child support); however, the courts, not the employer, enforce this limitation.
- Child support orders must be paid first.
- Employers may be required to provide data to the district attorney regarding garnished employees.
- An employer must follow the garnishment order even if the employee says the order is wrong. The employee must contact the authorities if they suspect a garnishment order is incorrect. Employers should not stop withholding wages until ordered to do so by the authorities. If an employer fails to comply with a garnishment order, the judgment creditor may bring a civil action against the employer to recover any amount owed.
- Employers should be prompt in initiating garnishments; the wage withholding order requires the employer to begin withholding the amount specified in the order no later than the first pay period occurring 10 days after receipt of the withholding order. For more information on child support wage garnishments, call the California Department of Social Services at 916.651.8848.
- If an employer has operations in several states, a garnishment order delivered to the employer’s representative in another state binds the employer to the issuing state’s garnishment laws.
This report was reviewed for legal accuracy and updated in 2017 by Wilson Elser Moskowitz Edelman & Dicker LLP.