If an employee quits but has an outstanding loan owed to the company, can it be deducted from the employee’s final pay?

The short answer is no. An employer cannot deduct from an employee’s final paycheck any amount representing the unpaid balance of a debt owed by the employee.

In California, wage deductions from final pay are highly regulated. An employer can lawfully make certain deductions from wages, including health insurance premiums and garnishments, but there are strict limitations on other deductions.

California Labor Code Section 221 states it is “unlawful for any employer to collect or receive from an employee any part of wage theretofore paid by said employer to said employee.” This means an employer cannot take back wages already paid to an employee.

In addition, California Labor Code Section 300 states that no assignment of future wages can be made, unless they are assigned for necessities of life and then only to the person furnishing the necessities.

The courts also have held that employers are prohibited from making deductions from wages that are a “self-help” remedy for the employer. (Sniadach v. Family Finance, 395 US 337 (1969)).

The California Division of Labor Standards Enforcement (DLSE) wrote in an opinion letter that “case law makes clear that deductions from an employee’s final paycheck for debts owed to the employer are prohibited, even with prior written authorization.”

The bottom line is that an employer is prohibited from deducting an outstanding loan from an employee’s final paycheck.

If an employer makes an unlawful deduction from an employee’s final pay to recover an outstanding loan or any other debt, an employee can file a wage claim with the DLSE or in court and the employer may face stiff penalties and potential attorney fees.

Read more about Final Pay in the HR Library.