It's My Money – I Can Cry (or File a Claim) if I Want To

Do you withhold the value of the property your employees have not returned to you from your employees' final paychecks? Do you take amounts the employee is "short" or that you assume your employee has stolen from you out of his or her paycheck? Are your employees required to pay for their uniforms or other "purchases" through a payroll deduction? Do you have an education or relocation assistance policy that requires that the employee reimburse you for a portion of the assistance out of his or her final paycheck if the employee does not stay with you for a certain length of time? If you are taking these or other "voluntary" deductions from your employees' paychecks, you need to be sure you are in compliance with the law so that you avoid claims by your employees or former employees for monetary damages.

Many states, including Indiana, have statutes that permit voluntary payroll deductions under certain, limited circumstances. In most states, payroll deductions (other than those required by law, such as taxes and garnishments) are not permitted without written permission from your employees. Indiana requires not only that the permission, or "authorization," be in writing, but also that the authorization contains specific language allowing the employee to revoke the authorization at any time. In addition, for the authorization to be valid, the employer must sign the authorization and provide a copy to the employee within 10 days.

Some state statutes also limit the reasons for which the employee can authorize a voluntary deduction from his or her paycheck. Again, Indiana is one of those states. Indiana's statute lists specific permissible deductions from an employee's paycheck, assuming the proper written authorization is received. These reasons include:

· Certain insurance premiums;

· Charitable contributions;

· The price of bonds or securities, issued or guaranteed by the United States;

· The price of shares of stock in the employer or parent company;

· Union dues;

· The price of merchandise sold by the employer to the employee;

· Payments on a loan made to the employee from the employer, but only if evidenced by a written loan instrument;

· Contributions, assessments, or dues for a medical expense plan, pension plan or other benefit plans;

· Payment to any credit union, nonprofit organizations, or associations of employees of such employer organized under any law of this state or of the United States;

· Deposits or credits to an employee's account by electronic transfer;

· The price of shares in a mutual fund; and

· A judgment owed by the employee if the payment is made in accordance with an agreement between the employee and the creditor and is not a garnishment.

Note that this list does not include many of the deductions frequently made by employers that are listed in the fist paragraph of this article. Also note that some of these permissible deductions are further limited by the statute.

What are the consequences of making an impermissible deduction from an employee's paycheck? It differs from state to state. In Indiana, an impermissible deduction causes a violation of the Wage Payment or Wage Claims statutes. These statutes require that employers pay employees or former employees all wages due and owing on the regular pay dates. If the payments are not made timely, the employee can seek not only the unpaid wages, but also an additional amount of up to twice the unpaid wages plus attorney fees. In addition, if the deductions reduce the employee's pay to an amount below minimum wage, there may be a violation of the Fair Labor Standards Act, resulting in additional damages. Although the pay at issue may not be significant for one employee, it is possible that a "class" could be formed of all employees from whom the employer took impermissible deductions, leading to substantial monetary damages.

Bottom line: Make sure you know the laws related to deductions from wages in the states where you have employees. Once you know those laws, make sure any deductions you make are permissible or that you understand and are willing to take the risk of making impermissible deductions.

If you would like to review the permissibility of the deductions you are making, please contact Tami A. Earnhart or any member of our Labor and Employment Practice Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.