DLSE Confirms That Employers May, Under Some Circumstances, Recover Wage Overpayments
Employers sometimes overcompensate their employees due to pre-determined payroll practices that pay employees for an assumed number of work hours before actual timesheets are submitted or processed. California law generally prohibits an employer from making deductions from an employee’s wages except as required by state and federal law for certain withholdings (eg. taxes) or as authorized by the employee for medical/health benefits or pension plan contributions. However, the Department of Labor Standards Enforcement (DLSE) recently issued an Opinion Letter that concludes that employers may generally recoup these overpayments provided these conditions are met: (1) the deduction cannot cause the employee to earn less than the Minimum Wage; (2) the deduction is expressly authorized by the employee in writing; and (3) the deduction cannot be taken out of an employee’s final paycheck.
In coming to its conclusions, the DLSE analogized the situation of a deduction due to an overpayment as a result an employer’s regular payroll practice that pays a predetermined amount to an employer’s recoupment of commission advances. In both situations, the subsequent recovery was for “‘advances’ for hours not worked.” Moreover, the employees of the employer requesting this opinion letter saw the wage recoupment in the next payroll period based on the employee’s submitted timesheets showing he or she did not work all hours for which he or she was paid. As a result, the overpayment recovery was both predictable and proper.
For the overpayment recovery to be valid, it must be authorized in writing by the employee. The DLSE opined that the submission of timesheets showing he or she worked fewer hours than he/she was paid is insufficient, unless it “expressly and voluntarily authorizes a specific prospective deduction.”
The DLSE also stated that no deductions of any sort may be taken from an employee’s final paycheck, and doing so would subject the employer to waiting time penalties of up to 30 days’ wages under Labor Code Section 203, referencing the decision of Barnhill v. Saunders, 125 Cal.App.3d 1 (1981) (employer may not deduct balance of employee loan in “balloon type payment” from final paycheck even with prior authorization). Note, however, that language in the Barnhill decision suggests that the Court was more concerned with the “balloon type” payment required by the employer. Other case authority on this subject suggests that it may be permissible for an employer to make deductions from a final paycheck if the employee voluntarily signs a new writing authorizing the specific deduction, again, assuming doing so does not cause the employee to earn less than the minimum wage or result in a “balloon type” payment.
The DLSE’s Opinion Letter on this subject was limited to the situation where the overpayment resulted from a regular payroll practice where overpayment was both predictable and expected, as opposed to situations where employers overpaid employees due to clerical, accounting, or administrative error. Accordingly, employers are cautioned to consult with legal counsel before attempting to recover wage overpayments.