You may remember "Elmer Employer," our hypothetical Central Kentucky small business owner from previous columns, who had some recent troubles with the Kentucky Department of Labor on overtime issues. Having straightened those up, he is hoping that his employment troubles are now behind him. Elmer is very pleased to have recently hired a new employee, Annie Assistant. Annie is very efficient at her job. Unfortunately, she is not so good at handling her personal finances and finds herself running short of money from time to time. To help her out, Elmer loans her $25 or $50 whenever she runs short, and then, once every couple of months, with Annie's verbal "okay," he instructs his bookkeeper to deduct the accumulated total of the loans from Annie's next paycheck.
In January 2008, Elmer became very busy. Even though he continued to lend Annie money, he did not have time make sure that the bookkeeper deducted the amounts from her paychecks. Rather, Elmer just wrote the amounts down on his desk calendar, and determined to work out the deductions later. By March 31, he had lent Annie $300, without making any deductions from her paychecks.
Much to Elmer's surprise, Annie abruptly quit her job on April 1. Elmer instructed his bookkeeper to deduct the $300 from her final paycheck.
Three weeks later, Elmer got a call from the Kentucky Department of Labor, informing him that he would have to return to Annie not only the $300 he deducted from her final paycheck, but also the amounts he had deducted from her previous paychecks. Elmer was sure the investigator was wrong. Was he?
Kentucky law places a number of restrictions on employers from making deductions from employees' paychecks, even for seemingly legitimate purposes. This is especially true in the case of an employee's final paycheck. When an employee quits or is discharged, employers must pay the departing employee all wages or salary due him or her on the next normal pay period, or within 14 days of the separation, whichever is later. It does not permit the employer to set off against the wages or salary any sums the employee owes the employer. If the employee leaves owing money for unpaid loans, unreturned uniforms or equipment or anything else, the employer may not hold the employee's paycheck hostage or make deductions from it to recoup the unpaid debt. Instead, unless the employee voluntarily gives the property back or repays the indebtedness, the employer must sue the employee to recover the monies owed.
But what about those deductions from Annie's paychecks while she was employed? Another provision of Kentucky wage and hour law prohibits employers from withholding from any paycheck any part of the wage agreed upon, with a few exceptions. Employers can always make deductions permitted by local, state or federal law (for taxes for example), can deduct for union dues and can make deductions expressly authorized by the employee in writing. However, an employer may never deduct certain items from an employee's paycheck, even if the employee expressly agrees. These items include fines; cash shortages in a cash box or register used by two or more persons; and losses due to breakage, defective or faulty workmanship or lost, stolen or damaged property.
In this case, Elmer may attempt to convince the investigator that he was not withholding any money from Annie's paychecks, but rather was just making advance payments toward wages to be earned in the future: Since he effectively paid her in advance, he should not have to pay her twice. This argument might be strong if he had just made the "advance" payments shortly before the paychecks were due. In this case, Elmer's payments to Annie look more like miscellaneous loans, randomly deducted from her pay.
How could Elmer have avoided this problem? Very simply. He could have had Annie sign a series of authorizations characterizing the payments as advances against her wages and indicating her consent that the specific amount advanced would not be included in the next regular paycheck (or paychecks). He should have had Annie sign an authorization each time he lent her money, and each authorization should have been very specific as to the amount loaned, or advances, and the amount to be deducted from which future paychecks. He should also remember that the best practice is not to make any deduction from the final paycheck (other than as required by law).
Do you have a question about employment law issues? E-mail Wendy Becker at wlb@gdm.com and your question may be addressed (anonymously, of course) in a future issue. Wendy Becker is a member in the Lexington office of Greenebaum Doll & McDonald PLLC.