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Allowable Deductions Under the FLSA

 

Under the Fair Labor Standards Act, allowable deductions from minimum wage include:

Meals, Lodging, and Other Facilities
Tip Credits
Voluntary Wage Assignments
Loans and Wage Advances
Vacation Pay Advances
Uniforms and Uniform Cleaning Costs
Employee-Owed Payroll Taxes
Union Dues
Court-Ordered Garnishments or Statutorily-Required Wage Attachments
Cash Shortages Due to Misappropriation

 

Meals, Lodging, and Other Facilities    Top of Page

 

Under restricted circumstances, the employer may deduct the reasonable cost of meals, lodging, and other facilities furnished to the employee in connection with the employment, provided, among other things, that the employer does not profit thereby (see 29 U.S.C. 203(m), 29 C.F.R. 531.29, and 29 C.F.R. 531.33; recordkeeping requirements are found in 29 C.F.R. 516.27; also see FOH, Sections 30c00 - 30c09, mentioning restrictions on deductions and some narrowly-defined administrative costs associated with certain facilities that can be included as a credit against minimum wage).

 

Employer expenditures for meals, lodging, and other facilities furnished to employees fall under the category of "payments in kind", regulated by the Texas Payday Law (Section 61.016(b) of the Texas Labor Code), and deductions for such costs must be authorized in writing by the employee.

 

Tip Credits    Top of Page

 

Under Section 203(m), an employer need pay a "tipped employee" only $2.13 per hour, since the law assumes that tips will make up the difference between that amount and minimum wage (this did not change with the recent increase in the minimum wage). A "tipped employee" is defined as someone who earns at least $30 per month in tips (29 U.S.C. § 203(t)). If such an employee feels that the tips do not make up the difference, he or she may request a review of the problem by the DOL under 29 C.F.R. 531.7.

 

Since the tip credit is in cash and the actual tips are paid not by the employer, but by customers, this would not be a "payment in kind", as is the case with a deduction for lodging furnished to an employee. Even though paying a tipped employee $2.13 per hour can be thought of as the end result of deducting the tip credit of $5.12 per hour from the required minimum wage of $7.25 per hour, the tip credit does not have to be authorized in writing by the employee in order to be valid under the Texas Payday Law, since it is specifically authorized by the federal statute. However, Section 203(m) provides that the tip credit may not be used toward payment of minimum wage "unless such employee has been informed by the employer of the provisions of this subsection, and all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips." New disclosure requirements for tipped employees, adopted by DOL in 2011, are found in 29 C.F.R. § 531.59(b): prior to taking the tip credit, the employer must notify tipped employees of the following: the amounts of the cash wage paid and tip credit taken; that the tip credit may not exceed the value of the tips actually received; that all tips received by the employee must be retained by the employee except for amounts contributed toward a valid tip-pooling arrangement; and that the tip credit will not apply to any employee who has not been informed of these requirements. Regarding tip-pooling / tip-sharing agreements, click here.

 

The tip credit of $5.12 per hour does not vary for overtime hours. A minimum wage tipped employee who would get $10.88 per hour in the absence of a tip credit would get $5.76 for each overtime hour with the tip credit.

 

Voluntary Wage Assignments    Top of Page

 

Deductions for voluntary wage assignments, i.e., for things that benefit the employee, may take an employee's wages below minimum wage, provided the employer does not profit thereby (includes such things as employee contributions to a health or retirement plan (see 29 C.F.R. 531.40(c)) and FOH, Section 30c10(a)).

 

Employers in Texas are under no statutory obligation to honor voluntary wage assignments (see Reef v. Mills Novelty Co., 126 Tex. 380, 89 S.W.2d 210 (1936), in which an attempted assignment of a sales employee's commission pay did not bind an employer whose contract with the employee prohibited an assignment of commissions without the employer's consent). An employer may be under a contractual obligation to do so, however. That would be the case if the employer had contracted with a third party, such as a health care insurance provider, to deduct wages for insurance plan contributions and remit them to the insurance carrier in return for coverage for the employees. That is not the case, though, if the employer's company had no prior business relationship with the beneficiary of the assignment, for example, a payday loan company that makes a short-term loan to an employee. In such a case, it would be optional on the employer's part to comply with the wage assignment. If the employer refused to comply with the wage assignment, the alternative for the payday loan company would be to go to court against the employee and seek to enforce its rights in a civil lawsuit.

 

This type of deduction must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

Loans and Wage Advances    Top of Page

 

Repayments of loans and wage advances from the employer to the employee may take an employee below minimum wage; it is up to the employer to document the existence of the loan or advance (deduction allowed for principal only - no interest or administrative fees - see FOH, Section 30c10(b) (1988)). Here is the relevant text of FOH § 30c10(b):

 

30c10 Voluntary assignment of wages, loans, and advances.
(b) While loans and cash advances made by an employer are not "facilities", the principal may be deducted from the employee's wages, even where such a deduction cuts into the minimum wage or overtime due under FLSA. Deductions for interest or administrative costs on the loan or advance are illegal to the extent that they cut into the minimum wage or overtime pay. The existence of the loan or advance shall be verified to the extent possible.

 

This category would include any instance in which the employer advances money to the employee to pay for something on the employee's behalf for which the employee would normally be personally responsible. This category also includes wage overpayments.

 

This type of deduction must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

Special precaution for loans and wage advances: employers should never loan money or advance wages to an employee without treating the occasion like a bank would. That means securing the employee's written agreement on a separate loan or wage advance document listing all the particulars of the transaction, such as amount loaned or advanced, date of transaction, full name and social security number of the employee, the amount and frequency of repayment installments, and what happens to an unpaid balance remaining when the employee leaves the company. Finally, find out what legal formalities are necessary in Texas and your other states of operation to make a valid promissory note and include such language in the loan or wage advance agreement, so that if the employee fails to satisfy the repayment obligations, the company will have the option of taking the ex-employee to civil court.

 
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Special precautions for insurance premium advances: some employers may from time to time pay an employee's usual contribution toward a group health plan. The reason may be an attempt to comply with the Family and Medical Leave Act, if the FMLA applies, or simply a desire on the part of an employer to help the employee out during a leave of absence. Whatever the reason, the employer ends up giving the employee what amounts to a loan, the proceeds of which are applied to a benefit for the employee. If the employer wants to be able to recoup that money, it would be well-advised to include some special wording about this kind of situation in the employee handbook and the wage deduction authorization agreement. The policy in the health benefits section of the employee handbook might read as follows:

 

During a leave of absence of less than ["x"] weeks' duration, unless the employee has previously arranged to pay the insurance premiums in advance or during the leave, the employer will advance to the employee an amount equal to the premium payments required to maintain the employee's health insurance in force. The amount so advanced will be treated as an advance of future wages payable, and the advance will be deducted from any paychecks the employee might receive following the employee's return from the leave of absence. The amount to be deducted will be [one-third of / one-half of / the amount so advanced] from the employee's [first three paychecks / first two paychecks / first paycheck] following the date of the employee's return from leave. If the employee separates from employment prior to repaying the advance in full, any unpaid balance remaining from the advance at the time of the employee's separation from employment will be deducted in full from the employee's final paycheck.

 

The above excerpt is merely an example of how such a policy might be worded and serves only to illustrate the concepts involved. The actual wording depends upon whether and to what extent the employer might wish to have such a procedure and on what the wage payment laws require in the employer's state or states of operation other than Texas. In addition, corresponding language should go into the wage deduction authorization agreement, and the employees should be required to sign the agreement as a condition of continued employment. New hires can be required to sign such an agreement as a condition of hire.

 

If the employer does adopt such a policy, it should be prepared to pay the health insurance premiums for all similarly-situated employees or else face possible charges of discriminatory treatment. The practice could be restricted to employees out on health- or family-related absences, or even only to employees out on FMLA leave.

 

Also in the category of a loan or wage advance would be an employer's payment to a third party of a fine or fee on behalf of the employee: "An employer may also count as wages any sums paid to a third party at the request of the employee. The payment by the employer to the third party is equivalent to a loan to the employee, or an advance against his salary. Accordingly, deductions to recoup the outlay must be counted as wages." Brennan v. Veterans Cleaning Service, Inc., 482 F.2d 1362, 1369 (5th Cir. 1973).

 

Not included as a loan or wage advance would be the extension of "store credit" to an employee for the purchase of goods or services from the employer. Thus, deductions or set-offs for debts owed to the employer for goods and services cannot take the employee's pay below minimum wage. See Brennan v. Veterans Cleaning Service, Inc., 482 F.2d 1362, 1370 (5th Cir. 1973), and Brennan v. Heard, 491 F.2d 1, 3 (5th Cir. 1974).

 

Vacation Pay Advances    Top of Page

 

Vacation pay advances are afforded the same status as loans and wage advances - see the DOL's Field Operations Handbook, Section 30c10(c) (1988), as well as DOL opinion letters, FLSA-834, issued on October 11, 1984, and FLSA2004-17NA, issued on October 6, 2004. Here is the relevant text of FOH § 30c10(c):

 

30c10 Voluntary assignment of wages, loans, and advances.
(c) In the situation where an employee is granted vacation pay prior to that individual's anniversary date, or the established date of entitlement, with the understanding that such pay constitutes an advance of pay and the employee quits or is terminated before the entitlement date, the employer may recoup the advanced vacation pay, even where such recoupment cuts into the minimum wage or overtime pay required under FLSA.

 

This type of deduction must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

Uniforms and Uniform Cleaning Costs    Top of Page

 

Under severely restricted circumstances, the reasonable cost of uniforms and associated cleaning costs may be deducted from wages, or the employee may be expected to purchase clothes that are consistent with a dress code, even if the deduction or cost takes the employee below minimum wage. If supplied by the employer, it must be clear that such clothes are furnished as a convenience to the employee (generic clothing suitable for off-duty use), and that those particular outfits are not a condition of employment or otherwise required for the job (see 29 C.F.R. 531.3(d)(2)(iii), 531.32(c), and 531.35; also FOH, Section 30c12 (1988)). The cost of specially-branded company clothes may not take an employee below minimum wage. Below are relevant portions of FOH § 30c12:

 

30c12 Cost of furnishing and maintaining uniforms.
(a) Where uniforms are required by law, employer, or type of work
If the wearing of clean uniforms is required by law, by the employer, or by the nature of the work, the financial burden of furnishing or maintaining these clean uniforms may not be imposed upon the employees if to do so would reduce their wages below the minimum wage (see 531.3(d)(2), 531.32(c), and 531.35).
(f) Definition of "uniforms"
(1) Although there are no hard and fast rules ..., the following principles are applicable:
a. If an employer merely prescribes a general type of ordinary basic street clothing to be worn while working and permits variations in details of dress, the garments chosen by the employees would not be considered to be uniforms.
b. On the other hand, where the employer does prescribe a specific type and style of clothing to be worn at work, e.g., where a restaurant or hotel requires a tuxedo or a skirt and blouse or jacket of a specific or distinctive style, color, or quality, such clothing would be considered uniforms.
c. Other examples would include uniforms required to be worn by guards, cleaning and culinary personnel, and hospital and nursing home personnel.
(g) Employee elects to buy additional uniforms, in excess of number required
Where an employer supplies, free of charge, or reimburses the employees for a sufficient number of uniforms required to be worn, and all or some employees elect to purchase additional uniforms in excess of the number required, the employer will not be required to reimburse the employees for costs incurred in purchasing uniforms in excess of the required number.

 

This type of deduction must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

Employee-Owed Payroll Taxes    Top of Page

 

Another type of deduction allowed from minimum wage is for employee payroll taxes, such as income tax withholding and FICA, as well as any other taxes owed by an employee, but paid by the employer on the employee's behalf (see 29 C.F.R. 531.38 and FOH, Section 30c14).

 

A deduction for required payroll taxes (FICA and withholding) does not need to be authorized by the employee to be valid under the Texas Payday Law. A deduction for other payroll taxes paid by the employer on the employee's behalf would need to be authorized in writing by the employee.

 

Union Dues    Top of Page

 

Union dues that are authorized by the worker under a collective bargaining agreement may be deducted from an employee's wages even if the wage goes below minimum wage (see 29 C.F.R. 531.40(c)).

 

Deductions for union dues must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

Court-Ordered Garnishments or Statutorily-Required Wage Attachments    Top of Page

 

Under DOL regulation 29 C.F.R. 531.39, deductions for court-ordered garnishments and other wage attachments required by law may take an employee below minimum wage. Common examples are payroll taxes (withholding tax, FICA); bankruptcy court garnishments; court-ordered child support or "spousal maintenance" payments (alimony) (an employer may charge an administrative fee of up to $10.00 per month on child support payments - see V.T.C.A. Family Code, Section 158.204); IRS tax levies (26 U.S.C. 6331(a, d), 6334(d)); and guaranteed student loan wage attachments ( 20 U.S.C. 1095a; in addition, a state law, V.T.C.A. Civil Practices and Remedies Code, Section 63.006, allows employers to deduct from current wages a limited amount each month (the actual cost, or $10.00, whichever is less) as an administrative fee in connection with a student loan wage deduction). Limitations on the amount of money that can be deducted due to multiple wage attachments and/or garnishments, except for bankruptcy garnishments and IRS tax levies, are found in Title 29, C.F.R., Part 870. For limitations on tax levies, see IRS Publication 1494 (http://www.irs.gov/pub/irs-pdf/p1494.pdf (PDF)). There is no limit on the amount a bankruptcy court may order garnished from wages; the bankruptcy trustee takes the previously-mentioned limitations into account when distributing the wages garnished from the debtor.

 

The garnishment and wage-attachment exception to the minimum wage law does not include administrative fees associated with handling such matters - see the topics on deductions for interest, administrative fees, and other costs to the employer below for details.

 

This type of deduction does not need to be authorized by the employee to be valid under the Texas Payday Law.

 

Special caution relating to garnishments: Federal law prohibits an employer from discharging an employee due to "any one indebtedness" that results in a garnishment order, i.e., a single garnishment. While it is true that neither federal nor state law limits an employer's ability to discharge an employee who has two or more garnishments against his pay, it is not recommended to base a discharge on garnishments, since nothing would bar Texas state courts from deciding in a future case that public policy would be best served by forbidding such actions by employers. In addition, the DOL has stated that counting a warning for a single garnishment against an employee for purpose of a progressive disciplinary policy that results in the employee's discharge would violate the federal law (Wage and Hour Opinion WH-31, April 28, 1970).

 

Cash Shortages Due to Misappropriation    Top of Page

 

Finally, the employer may deduct the amount of cash shortages that are provably the result of theft or other misappropriation by the employee, even though such a deduction might take the employee below the minimum wage level; the employer bears the burden of proving that the employee was personally and directly responsible for the misappropriation (see Mayhue's Super Liquor Stores, Inc. v. Hodgson, 464 F.2d 1196 (5th Cir. 1972). Ordinary cash register shortages, losses of money due to ordinary negligence, and losses due to damage, destruction, or loss of equipment may not be deducted from the wages of employees to the extent that the deductions would take employees below minimum wage. For more details, see "Focus on Misappropriation Deductions" in this book.

 

This type of deduction must be authorized in writing by the employee to be valid under the Texas Payday Law.

 

 

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