Docking Pay: When is it OK?

July 30, 2018

One of the largest expenses an employer faces relates to payroll. As such, it can be tempting to deduct wages from an employee who, for example, loses a company phone, doesn’t clock out on time, produces a faulty product, or constantly has a short drawer at the end of a shift. But you should beware. State law provides specific restrictions relating to when wages can be deducted. Failure to follow them could result in double damages and even a claim for employment discrimination—a hefty price to pay for a drawer that is short $50. Read on for guidance on when wage deductions are proper.

Deducting Pay Under State Law

The Fair Labor Standards Act (FLSA) does not prohibit you from docking a nonexempt employee’s wages for things such as property damages, property theft, cash shortages, and required uniforms. The only restriction under the federal law is that the deductions shouldn’t reduce the employee’s wages below the required minimum wage or overtime compensation.

State law, on the other hand, isn’t so free of restrictions. Wisconsin Statute Section 103.455 is aimed at protecting employees from having to bear what are considered the employer’s “costs or operating a business.” Once an employee earns wages, you may not make deductions from those wages for “defective of faulty workmanship, lost or stolen property or damages to property,” unless one of three exceptions applies.

Under the first exception, you can deduct wages for faulty workmanship or certain other losses if the employee agrees to the deduction in writing. However, he must authorize the deduction, in writing, after the loss has occurred. Thus, a “blanket authorization” signed at the time of hiring and allowing you to deduct wages for fault is not appropriate. Additionally, the term “wages” has been interpreted broadly and includes a variety of forms of employee remuneration. Therefore, you can’t circumvent the statute by deducting from an employee’s commission, for example.

Under the second exemption, you can deduct wages if you and a representative designated by an employee determine that the employee is responsible for the loss resulting from his negligence, carelessness, or willful and intentional conduct. The exemption serves the underlying public-policy goal of the statute—that is, to prevent you from arbitrarily deducting earned wages. In a sense, the statute affords a method of due process to the employee. Therefore, an employee or his representative must have an opportunity to establish that the loss wasn’t due to the employee’s “negligence, carelessness, or willful and intentional conduct.” He can’t be liable for damages or loss caused by defective material or a defective machine, for example. If you and an employee disagree about responsibility for the loss, the Department of Workforce Development can serve as a third determining party.

Lastly, under the third exemption, you can deduct wages if the employee is found guilty in a criminal case for the loss. Absent unusual circumstances, this exemption likely only comes into play if you initiate the court proceedings. Depending on the amount of loss you suffer, this may or may not be a viable option.

An employer that deducts wages in violation of Section 103.455 may be liable for a hefty cost. The statute provides that an employee can file suit against the employer for an improper deduction, and if he prevails, the employer can be held liable for double the deductions that were taken. Moreover, if an employee is discriminated against or discharged in connection with any proceeding to recover a deduction, he or she will have the basis to assert a claim for wrongful discrimination. This opens the door for liability related to lost wages.

Overpaid or Unearned Wages

Notably, the statute only offers these protections to employees who have actually earned the wages that are taken away. In other words, it doesn’t cover circumstances in which an employer mistakenly overpays an employee or when an employee pads his time card, intentionally causing overpayment. In these situations, an employer can deduct wages without prior written permission from the employee, a prior determination by it and a representative of the employee, or a court determination.

Also, you can still discipline an employee or even terminate her employment under these circumstances without running afoul of the statute. In a court of appeals case from 2010, the court held that an employer didn’t violate the public-policy consideration of Section 103.455 when it fired an employee for failing to bring to its attention that she was being paid for work she was no longer performing. Although the employee argued that she didn’t know she was being overpaid, the court held that that was inconsequential. The employee couldn’t seek protection under the statute because the overpaid wages weren’t wages that she had actually earned. Farady- Sultze v. Aurora Medical Center of Oshkosh, Inc., 2010 WI App 99, 4, 327 Wis. 2d 110, 787 N.W.2d 433.

This would seem contrary to the holding in Wandry v. Bull’s Eye Credit Union, where the Supreme Court held that an employer may not terminate an employee’s employment for refusing to such a deduction. In Wandry, the employee cashed a customer’s stolen check and was fired after refusing to reimburse her employer. The Court held that public policy considerations prohibited an employer from shifting the work-related loss to the employee, without giving her the opportunity to show that the loss was not caused by her carelessness, negligence, or willful conduct. While the Farady-Sultze court acknowledged the Wandry decision, it held that the decision did not apply to Farady-Sultze, as she never actually earned the wages.

Bottom Line

It can be tempting to dock an employee’s paycheck for that $650 broken smart phone, or that $50 missing from a cash drawer. Despite the best of intentions, such a decision can quickly get you into hot water. So, how should you approach such a situation? Simply put, don’t make a reflexive, one-sided determination. Instead, the best route would be to approach the employee regarding the loss and, if she agrees, make the appropriate deductions from each paycheck to ensure that her wages don’t fall below the minimum wage. Problems arise when the employee doesn’t think she was at fault and shouldn’t have to pay the price. An employer’s options at that point are to work with her or her representative to reach an understanding or proceed to court for a determination.

Finally, none of this is to say that you can’t discipline an employee for faulty workmanship and loss, theft, or damage to property. Indeed, neither the federal nor the state laws prohibit you from using disciplinary measures. You should have written expectations related to poor performance and damage to property and should use written warnings, suspension, and (if appropriate) termination when an employee falls below the expectations. Tread carefully to ensure that the termination or discipline isn’t connected to any proceeding to recover a deduction under Section 103.455.

This article, slightly modified to note recent updates, was featured in the July 2018 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

For more information about "Docking Pay: When is it OK?," contact Aneet Kaur at akaur@axley.com or 608.283.6786.