Employers are prohibited from making unauthorized deductions from wages which are, in effect, a self-help remedy for the employer.1 Labor Code section 221 prohibits an employer from recovering wages already paid to an employee.

You cannot deduct from wages (or require reimbursement) from an employee for any cash shortage, breakage or loss of equipment unless you show a dishonest or willful act, or gross negligence.2

Simple Negligence

Because shortages and other losses occur without fault on an employee's part, or because of simple negligence, employers must bear these losses as part of the cost of doing business.3

You can discipline employees whose carelessness or simple negligence results in your loss. However, employers who threaten to discharge or discharge an employee for complaining about an illegal deduction may face a claim of violation of public policy and wrongful discharge.4

For example, in a case that considered whether a company’s practice of requiring reimbursement or seeking criminal charges against employees for ordinary mistakes that resulted in monetary losses is lawful, the court held that such a policy likely violates the law that requires employers reimburse and indemnify all of their employees’ necessary expenditures and losses in the course and scope of their employment. California law and public policy favor protecting employees from an employer passing operating costs onto employees. Business losses or damaged property without dishonesty, gross negligence or a willful act on the employee’s part are not the employee’s responsibility.5

Dishonest or Willful Act or Gross Negligence

You may deduct from the employee’s wages an amount sufficient to compensate for loss or damage resulting from gross negligence, willful misconduct or dishonesty. You may take such deduction from the employee’s wages during employment and/or from the final check.

If you deduct from an employee’s paycheck any amount believed to be the result of gross negligence, willful misconduct or dishonesty, the burden of proof is on you to establish the weight of evidence for the withholding. If you fail to meet the burden of proof, you will likely be subject to waiting time penalties.6

Any doubt as to your ability to prove misconduct is therefore best resolved in a small claims or other court proceeding against the employee, rather than a deduction from wages owed that employee.

Employee Loans

You may not deduct from an employee’s final check any amount representing the unpaid balance of a debt owed by the employee, even though the indebtedness is contained in a written agreement to pay the full amount of the debt on demand, at termination or otherwise.

In Barnhill v. Robert Saunders & Co., 7 a California Court of Appeals seemed to approve of deductions for loans for which the employee had given written consent. However, the opinion conflicts with Labor Code section 300. The Labor Code states that no assignment of future wages can be made unless they are assigned for necessities of life — food, clothing or housing. Furthermore, the assignment must be made to the person supplying the necessities. If the employee is married, assignment of wages requires spousal consent.

The DLSE has issued opinion letters on several types of deductions for employee loans and debts. The opinion letters rely heavily on court cases to deny deductions.

Consider the following suggestions:

• If you loan money to an employee, require them to sign a promissory note guaranteeing repayment. Obtain the repayment by personal check or other form of payment — never through a payroll deduction.
• Discuss automatic enrollment in your 401(k) or other retirement plan with your benefits provider. Not all providers follow the automatic enrollment process.
• Review your policies and procedures about loans or advances, including advances on vacation and PTO, to ensure that you aren’t repaid by payroll deduction.

1. Sniadach v. Family Finance, 395 US 337 (1969); Randone v. Appellate Department, 5 Cal.3d 536 (1971)