California Employment Law

A colleague of mine said that her friend’s company (it’s always a friend) has a “you broke it, you bought it policy,” in that if an employee breaks or loses a piece of equipment, the employer deducts the costs from the employee’s pay check.  My colleague opined that the policy is likely problematic, but the employer was adamant that it had the right to deduct money from an employee’s wages for breakages or losses.  So who’s right? They both are.

Labor Code Section 224 prohibits an employer from making unauthorized deductions from an employee’s pay.  The statute authorizes deductions for taxes, court ordered garnishments, health insurance when authorized by the employee and as otherwise authorized by the employee in writing.  This means the Labor Code does not allow an employer to deduct money from an employee’s pay check without the employee’s written authorization except as otherwise provided by law.

So, does the Labor Code allow an employer to deduct for breakages or losses?  No, but most Wage Orders do in limited circumstances.  “No employer shall make any deduction from the wage or require any reimbursement from an employee for any cash shortage, breakage, or loss of equipment, unless it can be shown that the shortage, breakage, or loss is caused by a dishonest or willful act, or by the gross negligence of the employee.”  See, for example, Wage Order 4-2001, section 8.

I have three concerns with an employer relying on this subsection of the Wage Order as a basis for deducting money from an employee’s pay check.  

1. Although the Wage Order authorizes the deduction, the Labor Code does not.  Until a few years ago that would have been enough for me to advise my clients to avoid this briar pit.  After Bright v. 99¢ Only Stores, which held that the the Wage Order regulations can be enforced by the employee through a PAGA action, you might have a better argument that the Wage Order authorization is sufficient.  I’m not convinced, but I could make a credible argument supporting the deduction.

2. If you are wrong, you could face significant penalties.  What is “gross negligence” and what constitutes a “willful act?”  There are some case authorities interpreting the phrases, but you run the risk that a judge or a jury will disagree with your conclusion.  If the Labor Commissioner or a judge or a jury determines that you should not have deducted money from the wages, then you failed to pay an employee all wages earned and could be subject to penalties under Labor Code Sections 203, 204 & 210.  Labor Code Section 203 penalties can equal the employee’s daily wage multiplied by 30.  Is that worth the risk?
3. Even if there is no question the employee engaged in a culpable degree of negligence, the employer still has to pay the employee no less than minimum wage.  In my friend’s case, most of the employees only earn slightly more than minimum wage.  If the employer deducted too much money from the wages the employee would not earn minimum wage.  Any time an employer reduces an employee’s earnings to less than minimum wage without a court order or the employee’s written authorization, red flags fly and sirens wail.

An employer puts itself at risk whenever the employer puts itself ahead of other creditors by virtue of the fact that the employer controls the pay check.  For example, if I lent my car to a friend and that friend crashed into a pole, I don’t have the right to deduct money from my friend’s pay check to cover the loss without first obtaining a judgment and a garnishment order.  Why, then, should the employer be in a better position than other creditors?  The employer, just like the friend, can either work it out with the employee or take whatever judicial efforts are necessary to recoup the losses.

So, what should the employer do?  You can always tell the employee s/he is responsible for the loss and has to pay you back.  The employee can agree to make payments over time, either through payroll deductions or by separate payment.  If the employee agrees to pay through payroll deductions, the agreement should be in writing signed by the employee.  To be safe, I would still ensure the employee receives at least minimum wage.

If the employee refuses to pay for the loss, then you need to decide whether you will pursue the claim through court.  You may also want to consider disciplining the employee.  I would decide the discipline issue separate from the the repayment issue.  If you insist the employee pay you back through pay roll deductions and the employee refuses to allow you to deduct money from his/her pay check, the employee has likely engaged in protected activity.  You cannot fire the employee for refusing to allow you to deduct amounts from his pay check.  Therefore, discipline the employee for the breakage or loss (documented in writing), and then have the discussion about how the employee will pay you back.  Do not increase or decrease the discipline based on the way the employee agrees to pay you back.

If you are losing money due to employee losses and breakages, talk with an attorney or HR consultant familiar with the Wage Orders and the Labor Code before taking action.  The last thing you want to do is spend tens of thousands of dollars defending a wrongful termination or unpaid wage claim because an employee “accidentally” dropped the computer monitor out of the window.