There are three basic categories of deductions employers make from pay: legally required deductions, deductions for the employer's convenience and deductions for the employee's benefit.
One of the most complex parts of paying your employees is properly deducting money from employees' pay. The reason deductions from pay can be extremely complicated is due to the fact that various federal laws apply, and state laws may apply as well. The best approach an employer can take is to understand the three basic categories of deductions that are made from employees' pay and how to properly make them.
Deductions can be broken into three types:
- Deductions required by law. Examples are wage garnishments (taxes such as Social Security taxes and income taxes are also deductions required by law).
- Deductions for the employer's convenience. Examples are those made to cover overpayments, wage advances, docking (for things such as spillage, breakage, or cash register shortages).
- Deductions that are done as a favor for employees. Examples are benefit premiums, charitable contributions, and uniforms
Garnishments from wages
A garnishment is a court order letting you know that a legal claim has been made against an employee's wages. The order generally will have arisen from a legal proceeding filed by someone to whom your employee owes money.
The most common reason for garnishment is that the worker owes child support payments to a divorced spouse; in many states everyone who is paying child support will automatically have their paycheck garnished. But other creditors may obtain garnishments against your employee as well; if your employee is unable to pay the amount, the court will order that the amount be deducted from the employee's wages. In effect, you, as the employer, will be responsible for collecting the money from the employee's pay and getting it to the court for payment of the debt.
Notice of garnishment. In many cases, your involvement in a garnishment case will begin not with receipt of a garnishment order but with receipt of what is usually called a notice of garnishment.
Here's how the situation usually unfolds: a creditor wants to collect a debt from your employee. The creditor finds out that the employee may be working for you and sends you a notice of garnishment telling you of the debt and asking you to confirm that the employee works for you.
What should you do? First and foremost, contact an attorney right away! Writs of garnishment are serious business. In some states, you have only a certain amount of time to respond (sometimes a matter of days) and if you do not honor the writ and begin withholding, you can be held responsible for the entire debt of the employee!
To hopefully save yourself some time and money, run through the items on the following list before you see the attorney so that you get the most for your legal dollar:
- Examine the notice to determine what it demands of you — make sure that you understand its terms.
- Note how long you have to comply with the order.
- Note how much needs to be taken out of each check and when it must be remitted.
- Make sure that you understand where the money is to be sent.
- Note what kinds of records must accompany the payment — many state laws require a listing of who the remittance is for, the Social Security number, and other information.
- Note what to do if the employee doesn't work for you anymore.
- Notify the employee that you have received a garnishment and that you will comply with it — make sure that the employee understands that you will be deducting money from each paycheck.
- Change your payroll routine and records so that the amount will be deducted from each paycheck.
- If there is more than one garnishment for a single employee, make sure that the garnishments combined do not exceed the legal maximum that can be deducted, and if they do, how the garnishments should be prioritized and prorated (this is sometimes mandated by state law, as well).
Amount that may be garnished.
Generally, you can deduct garnishments from wages without violating the minimum wage rules because federal law treats money paid to a third party for the employee's benefit as the equivalent of payment to the employee. The federal law in question is Title III of the Consumer Credit Protection Act, and it has two primary requirements. The amount that can be garnished is limited to no more than either:
- 25 percent of your employee's disposable earnings (meaning, earnings after legally required deductions like payroll taxes, workers' compensation, or unemployment compensation premiums);or
- the amount by which disposable earnings exceed 30 times the current minimum hourly wage set by the federal Fair Labor Standards Act (FLSA).
In addition, under the federal law, you cannot terminate employees because their wages were garnished.
If the garnishment is issued under a state law, and that state law provides even more protection than the federal law, you would have to honor those additional protections.
State garnishment laws.
Sometimes even more so than federal law, state laws on garnishment are detailed and complex. When you talk to your attorney, be sure to ask how the following points are handled under your state's laws:
- how much can be garnished
- how multiple garnishments are treated
- what fees you, as an employer, can charge to the employee for garnishments
Expenses, overpayments and uniform deductions from pay
Employers may make deductions from an employee's pay to recoup certain expenses, for overpayments and for various uniform costs.
When the term "docking pay" is used, sometimes it means reducing an employee's pay for time not worked and sometimes it means reducing it to recoup expenses due to breakage, spillage, cash register shortage, and the like. Technically, reducing an employee's pay for hours not worked is not "docking."
The distinction is important because although the federal law does not prevent you from docking your employee's pay, it does require that any such deduction not reduce pay below the statutory minimum. So if you're docking for things like spillage or shortages, you might have to carry over some of the amount to the next pay period, to avoid breaking the minimum wage law.
When you reduce an employee's pay for time not worked, the minimum wage issue doesn't come into question.
Your employee Frankie is paid $10 per hour and therefore makes $400 in a typical 40-hour workweek. You can't dock Frankie more than $110 in a typical week because that would drop his pay below the minimum wage level ($7.25 x 40 = $290).
On the other hand, suppose Frankie arrives late and leaves early on a few days so that he only works 25 hours in the week. Even though you pay him only $250 for that week ($10 x 25), you have not violated federal law because you're not "docking" him for time worked.
Deductions for overpayments
Generally, if you paid an employee too much because of a legitimate bookkeeping error, you can deduct the mistaken overpayment from wages, even if the deduction reduces the pay below the statutory minimum wage for a particular pay period.
However, a second rule says that if the deduction would cause a hardship, you should spread the repayments out over time.
There isn't much government guidance on what would constitute a "hardship," so use your best judgment. It's also in your interest to work with the employee on this. If you don't leave an employee enough money to pay the bills due to some mistake the employee had no control over, chances are the employee is going to resent you and morale problems may result.
Deductions for uniforms
Even though,technically speaking, deductions from pay for uniforms are for your employees' convenience, if the cost of purchasing, renting, or maintaining a required uniform would reduce an employee's wage below the minimum hourly rate in any workweek, you are still required to reimburse the employee to the extent of the deficiency.
Mackenzie makes $9 per hour and works 40 hours per week. She is required to buy and wear a uniform for her job. The uniform costs $80. Mackenzie makes $360 per week, so after buying the uniform, her weekly pay is reduced to $280. The deduction reduces Mackenzie's regular hourly rate (pay divided by hours) to $7 — which falls below the minimum wage.
Instead, the employer should spread the cost of the uniform out over four weeks. The employer could deduct $20 a week for four weeks. That way, Mackenzie's pay will never drop below the minimum wage of $7.25 per hour, or $290 for a 40-hour workweek.
Paid time can be required for cleaning uniforms. The federal government assumes that if you require employees to wear a uniform, they spend one hour per week cleaning them. Therefore, you have to pay them for an additional hour of work per week, unless you and your employees establish a different arrangement.
If, however, the uniform is the type of clothing that can be washed with other personal garments, you don't have to pay the extra hour per week. So we recommend that if you have uniforms, make sure they're not of the "dry clean only" type.
Deductions from pay for benefit premiums
Employers may deduct from pay employees' share of benefit premiums for the convenience of the employees who participate. As a courtesy to your employees, if you offer benefits for which employees must share in the cost, you should deduct the amounts of premiums for those benefit plans to make sure that premiums are paid appropriately. After all, you're responsible for the payments as the employer providing the benefit.
Be aware that where the deductions for pension or health plans cut into statutory minimum wage and overtime pay requirements, you can deduct them only if the employee voluntarily agrees and you don't get any profit or benefit from the transaction.
Administering benefit premium deductions
Generally, if you enroll in any kind of employee benefit plan, the insurance carrier or benefit provider will provide you with the necessary forms to enroll employees in the plan. If a payroll deduction for part of the premiums is necessary, the forms should also have a part that specifically allows you, as the employer, to make deductions from the employee's paycheck and will provide a space for the employee to sign, acknowledging that the deductions will be taken.
Be sure you have the employee's signature before making any deductions.
Generally, benefit premiums are paid monthly, but employees are sometimes paid more frequently. The best way to handle this is to prorate the premium amount over the number of pay periods in the month.
Mike is an employee of Superstar Sporting Goods, a store that offers its employees a health insurance plan and pays its employees bi-weekly.
If Mike's monthly premiums for his health insurance coverage are $200, then the employer can take $100 out of each of the two paychecks that Mike receives for the month.
For months when there are three pay days in a month, Mike's third check would not have any health insurance premiums deducted.
In administering benefits deductions, it's important to know what you're paying for and when you're paying for it. Some companies want you to pay for the month's premiums in advance, which would mean that the deductions you make in March are for coverage in April. It can get tough to keep track of it, especially when people change their coverage levels (from single coverage to family coverage and vice versa). It may mean that you'll have to make refunds or withhold extra money from employees to make up for coverage increases, unless you have enough notice to make the adjustments beforehand.
Benefit providers usually send an itemized billing list once a month for the coverage that you are carrying on employees. Take care to reconcile this statement each month and make sure that you're not paying for coverage that employees no longer have and that your employees' deductions are enough to pay for the coverage they have. Make sure that employees who have terminated coverage are taken off your bill, too.