Nice Employers May Finish Last When Employees Owe Money

Employers with the best of intentions often wind up in a bind when an employee ends up owing them money. One scenario occurs when you advance employee wages via a loan or allow them to take vacation time before they earned it. Another example occurs when you accidentally pay an employee more than they were owed. If the employee refuses to pay you back or quits suddenly, you are in a pickle. Yet another scenario occurs when you think an employee owes you money because they have destroyed, damaged, or stolen your company property. In these situations, you need to tread with caution as you attempt to remedy the problem.

General Rules

Let’s start with your options. In California, an employer is not permitted to use “self-help” remedies to recoup what an employee owes them. In other words, you cannot take advantage of your status as the employer and simply deduct what is owed from the employee’s paycheck. Instead, you may have to sue the employee to get your money.

California provides that deductions may be made only if they are:

1. Required by law (i.e., income taxes),
2. Authorized in writing by an employee for the benefit of the employee (i.e., health insurance premiums), or
3. Pursuant to a collective bargaining agreement.

Debts Owed

An employer may lawfully have an agreement in writing with an employee that specific amounts loaned or advanced to the employee will be repaid in installments via payroll deductions. However, should the employee quit or be terminated before the loan or advance is fully repaid, the employer may not deduct the entire outstanding balance from the employee’s final paycheck. (Note: An employer is only permitted to deduct one installment on the final paycheck.) If you are considering lending money to an employee, be sure legal counsel reviews the contractual agreement for you.

The same is true for an accidental overpayment of wages or a “negative vacation balance.” Employers may not utilize self-help remedies to recover debts from the employee, including on the final paycheck.

Unless the employee voluntarily pays it back, the employer’s recourse would be to pursue the debts owed in court, as any other creditor.

Business Losses

When it comes to business losses, employers cannot make deductions due to an employee’s simple negligence resulting in a cash shortage, breakage, or loss of company property/equipment. This is because courts view “simple negligence” as inevitable in almost any business operation and they are considered the “cost of doing business.”

There is an exception, however, if the cash shortage, breakage, or loss of equipment is due to a dishonest or willful act, or by the employee's gross negligence. This is a difficult standard to satisfy, and the burden is on the employer to prove it was beyond simple negligence. As such, employers should consult counsel to ensure they satisfy this difficult standard, and check your applicable wage order for more information.

What Should You Do?

Given these limitations, employers should proceed with caution when advancing wages or vacation time, with the understanding that your options for repayment are limited. If you do advance wages, ensure the terms are covered by a contractual agreement.

Even then, you may still find yourself in a situation where the employee owes you money. For example, if you overpaid the employee, explain the mistake and communicate that the employee is not entitled to the money. Request that the employee voluntarily pay you back (such as by mailing a check). Sometimes, the employee may have already spent the funds and does not have enough money to pay you right away. Try to work with the employee to come up with a payment plan, if possible.

If the employee refuses to pay you back, they may be subject to disciplinary action, up to and including termination. If it is a departing employee, you may advise them that they will not be in good standing with the company and will be ineligible for rehire, per your company policies.

If you find yourself dealing with a tricky employment situation, give us a call! CEA members have unlimited calls with our HR experts (800.399.5331), Monday through Friday, 8am-5pm. We love to hear from you!