Deductions for Company Equipment

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Question

We have an employee who recently lost some expensive company equipment. Can we deduct the cost of the equipment from the employee’s paycheck? The employee is nonexempt, and we are located in California.

Answer

Employers must proceed cautiously when deducting from nonexempt employees’ wages to avoid potential wage claims. To determine which deductions are permissible, an employer should look at applicable state law, as states may handle wage deductions differently.

For example, in California, employers generally may not withhold an employee’s wages in whole or in part, unless the withholding or deduction is authorized (by law or by the employee) in writing. The California Division of Labor Standards Enforcement (DLSE) has specifically stated that an employer cannot legally make a deduction from wages if, by reason of mistake or accident, a cash shortage, breakage or loss of company equipment occurs. There is an exception that purports to provide an employer with the right to deduct for any cash shortage, breakage or loss of equipment if the employer can show that it was caused by a dishonest or willful act or by the employee’s gross negligence. However, the DLSE has cautioned that use of this deduction may, in fact, not comply with the provisions of the California Labor Code and various California court decisions. Additionally, the DLSE has stated that any employer that resorts to self-help does so at its own risk, as an objective test is applied to determine whether the loss was due to dishonesty, willfulness or a grossly negligent act.

In general, wage deductions and withholdings in California cannot reduce an employee’s gross wages below the minimum wage rate, unless authorized by law. Employers may not derive any financial gain from wage deductions.

Similarly, under federal guidelines, the cost of any items that are considered primarily for the benefit or convenience of the employer has restrictions—namely, no deduction may be made from an employee’s wages that would reduce the employee’s earnings below the required minimum wage or overtime compensation. This is true even if an economic loss suffered by the employer is due to the employee’s negligence. Examples of items that would be considered to be for the benefit or convenience of the employer are tools used in the employee’s work and damage to the employer’s property by the employee.

If any discrepancies exist among federal, state and local laws, employers must comply with the provisions that are most favorable to employees. Employers with questions on whether any specific deductions are permissible should consult legal counsel, who can also advise on potential other means that an employer may be able to use to recoup any money or property, such as an agreement, demand letter or lawsuit.