You just terminated an employee who has performed incompetently, causing you to lose business. Or perhaps you fired him for violating company policies. Maybe he cussed you out and then drove drunk and wrecked the company car while simultaneously sexually harassing a coworker who is now suing you for subjecting her to a hostile work environment. I'm going to give you the benefit of the doubt that the guy did something really bad and deserves to be fired a million times over. But the next thing you tell me is that he owes you something.
You say the employee's mistakes or behavior cost your business money, or he destroyed or failed to return company property. Maybe his paid time off bank has a negative balance because you let him take a two-week trip to Tahiti in January before all his vacation days had accrued. Whatever the reason, you are (rightfully!) mad at this guy, he cost you money, and you want it back. And guess what, you happen to be able to have the last word in the matter because his final pay is in your hands. It's so easy and so tempting to recoup at least some of your losses from a departing employee's final paycheck. But should you?
All is not fair in love and deductions
So, you ask, it's OK to deduct from the jerk's final paycheck the cost of the $750 laptop he dropped in the lake, right? And here's where I'm going to stop being your favorite person because the answer is, it's really not OK in a lot of situations.
I know, I know—it doesn't seem fair. But the first concept to keep in mind is that under the law, by and large, wages are considered the property of the employee as soon as he earns them, which is generally when he performs the work. So although you may not have processed payroll yet, the employee has already earned his final wages, and you owe him that paycheck. You happen to have control of the means of delivering his property, but that doesn't make it yours to take. So even if the employee owes you a potentially legally recoverable debt, or even if he has committed a crime, you aren't allowed to engage in "self-help" vigilantism to recoup your loss.
Think of it this way: If your next-door neighbor stole your laptop, you can call the police and try to get him charged with a crime, or you can take him to small claims court to try to get a judgment against him. But you can't steal his lawnmower and call it even. If you do, you'll be in as much trouble as he is. Same goes for "stealing" your employee's wages, no matter what you believe he owes you.
On the other hand, if you have an employee's written authorization to deduct amounts from his wages, including from his final pay, you may have alleviated your potential liability for "wage theft" in Tennessee and some other states. You can negotiate such an authorization after the fact, agreeing not to sue an employee who drowned your laptop if he permits you to deduct the cost of the computer from his final pay. Or you may obtain an authorization to deduct the cost of damaged equipment or similar losses in advance, as part of your onboarding process. Multijurisdictional employers should be careful, however, because some states don't permit wage deductions to cover losses even with written authorization from employees.
Wage and hour pitfalls
Finally, employers that want to deduct losses from departing employees' pay must be cognizant of the Fair Labor Standards Act (FLSA), the federal law that regulates payment of wages. Even if you have authorization from a nonexempt employee, you shouldn't take any deductions for losses that would reduce his pay below the minimum wage for the pay period. And any deductions for losses in any amount from exempt salaried employees' pay are dangerous, even with the employee's authorization, because such deductions may destroy the required salaried basis of payment, thus rendering the employee and the position itself effectively nonexempt. That scenario could lead to organizationwide overtime liability at a level that will make you quickly forget all about the $750 laptop.
If you withhold or slash an employee's final pay, he may call the Tennessee Department of Labor or the U.S. Department of Labor to complain. Those agencies may then make it their business to look a little more closely into your pay practices than you might like. The bottom line is, if you want to recoup your losses by docking or withholding final paychecks, you should get legal advice to make sure your proposed course of action won't land you in legal hot water.
This article originally appeared in the Tennessee Employment Law Letter by Butler Snow's Kara E. Shea.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
