Legal Clinic

Navigating California's Labor Laws

A decision to allow an employee to take vacation he or she has not yet earned could come back to haunt an employer when it tries to recoup the cost of those days from the worker's salary.

Monday, September 19, 2011
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Question: In California, is it illegal to deduct wages from a salaried employee who takes vacation time that he or she has not yet earned? If not, under what circumstances can we legally deduct wages from a salaried employee in that state?

Answer: In California, the issue of wage deductions is a constantly evolving and complex area of law, and penalties for improper deductions can be severe. You should, therefore, always take precautions and consult counsel before deducting wages from any employee's paycheck.

That said, in light of a Nov. 25, 2008 Opinion Letter by the California Department of Labor Standards Enforcement regarding the recovery of overpayment of wages, deducting wages from employees who take an advance on vacation is most likely permissible, but only when certain conditions are met.

First, you must obtain a signed, written authorization from the employee allowing you to deduct from his or her paycheck in advance of beginning the garnishments. Cal. Lab. Code § 300; Cal. State Employee's Ass'n v. State of Cal., 198 Cal.App.3d 374 (1988) (prohibiting monthly deductions from employee salaries to recoup erroneous overpayments where no written authorization was received).

Be sure to specify that deductions are for the purpose for repaying unearned vacation, and include the dollar amount of the periodic deductions.

Second, under no circumstances may you deduct an advance on wages from an employee's final paycheck, even where the employee has voluntarily signed a written authorization.

In Barnhill v. Robert Saunders & Co., 125 Cal.App.3d 1 (1981), the court concluded that an employer was not permitted to deduct the balance of a loan from a terminated employee's final paycheck.

The court's decision was based on the rationale that such final lump-sum payments could exact a significant and unanticipated hardship on employees who may not retain enough money to maintain a basic standard of living for themselves and their families.

The DLSE has held a deduction due to advances on vacations to be equally impermissible under Barnhill. DLSE Op. Ltr. 1991.05.16. Employers must be especially wary of making improper deductions from final paychecks, as doing so could lead to significant exposure for waiting-time penalties from the failure to pay wages at the conclusion of employment.

On the other hand, in its 2008 Opinion Letter, the Department deemed the recoupment of overpayment of wages in regular installments from an employee's paycheck (as opposed to a lump sum in the final paycheck) to be an acceptable practice.

While the DLSE decided this issue with respect to the accidental overpayment of wages, and it has never specifically considered the propriety of periodic recoupment of vacation advances, it stands to reason that the Labor Commissioner's principal concern -- that employees who do not receive full final paychecks will fall below a basic standard of living -- is alleviated regardless of whether the installment recoupment are for the purpose of recovering the overpayment of wages or for recovering advances against vacation time.

Third, your deduction may not reduce the employee's pay to below minimum wage for all hours worked in the pay period. DLSE Op. Ltr. 2008.11.25-1. In California, the current minimum wage is $8 per hour.

Following these three criteria should allow you to recover advanced vacation while avoiding legal liability.

However, if you would rather not venture into the minefield that is wage deductions, consider other options for dealing with vacation advances.

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For example, you may want to consider drafting a vacation policy that prohibits an employee from taking an advance on vacation. Or, if you do allow such advances, you may still require that the employee repay any unearned vacation time at termination via a check made out to the company.

In response to part two of your inquiry, California Labor Code § 224 carves out exceptions to the general prohibition against deducting from an employee's wages. In addition to the scenario discussed above, employers may lawfully withhold amounts from an employee's wages when:

* Required or empowered to do so by state or federal law (such as payroll taxes);

* A deduction is expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues, or other deductions not amounting to a rebate or deduction from the standard wage set by an agreement or statue;

* A deduction to cover health, welfare, or pension plan contributions is expressly authorized by a wage agreement or a collective bargaining agreement; or

* A nonexempt employee causes a cash shortage, breakage, or loss of equipment by a willful act or gross negligence.

Cal. Lab. Code § 224, Cal.Wage Orders §  8.

California's labor laws are viewed by many as among the most complex and antiquated in the nation, and, as my response to your question indicates -- its laws with respect to wage deductions are no exception. Therefore, it is recommended that you seek the advice of legal counsel conversant in California wage-and-hour laws whenever you need help navigating these thorny legal issues.

Keisha-Ann G. Gray is senior counsel in the Labor & Employment Law Department of Proskauer in New York and co-chair of the Department's Employment Litigation and Arbitration Practice Group.

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