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Deduction Problems under the Texas Payday Law

 

Lawful and Authorized in Writing

Wage Overpayments

Deductions for Interest

Deductions for Administrative Fees

Deductions for Other Costs to the Employer

Wages in Kind

Electronic Fund Transfer of Wages

Tips and Strategies

Texas Payday Law Deduction Summary

 

Lawful and Authorized in Writing    Top of Page

 

Under section 61.018 of the Texas Payday Law, all deductions, other than payroll taxes, court-ordered garnishments, and other deductions either required by law or specifically authorized by statute, must be both lawful and specifically authorized in writing by the employee. There are two main problem areas with deductions under the Payday Law. One consists of cases stemming from deductions that are allowed under the law, such as the ones detailed above that can take an employee below minimum wage, but for which the employer has failed to get written authorization from the employee. The other category consists of claims resulting from deductions that the employee may have authorized in writing, but which violate state and/or federal laws. That would be the case, for example, with deductions that violate the minimum wage or overtime laws, that have to do with debts arising from illegal transactions (such as illegal gambling and contraband), or that violate certain other laws providing limitations on what employers can take from an employee's pay, such as the limitations on the amounts to be deducted for child support garnishments, IRS tax levies, or student loan wage attachments (see V.T.C.A. Family Code Section 158.009, 26 U.S.C. 6334(d), and 20 U.S.C. 1095a(a)(1), respectively).

 

Wage Overpayments    Top of Page

 

A type of wage deduction that defies easy classification is that of a deduction to offset an overpayment of wages, which was specifically found in the case of Benton v. Wilmer-Hutchins I.S.D., 662 S.W.2d 696 (Tex.App. - Dallas 1983; overruled in part in Orange County v. Ware, 819 S.W.2d 472, 474 (Tex. 1991)), to violate the restriction in the Texas Constitution on garnishment of current wages. The Texas Supreme Court's Orange County decision held that self-help by a creditor-employer, i.e., the offsetting of mutual debts between an employer and employee, did not amount to a garnishment that would be covered by the Texas Constitution, but acknowledged that it might be limited by some other form of law. The only other generally applicable and potentially relevant law in this situation would be the statute regarding attachment of current wages in the Texas Property Code (V.T.C.A., Property Code, Section 42.001(b)(1)). The Texas Supreme Court did not mention that statute, but cited a specific provision of the Local Government Code, Section 154.025, which prohibits a county from issuing a warrant (in the Orange County case, a paycheck warrant) to an individual who is indebted to the county. One might assume that the Texas Supreme Court would be aware of the Property Code provision cited above, and thus that the Court felt that the specific Local Government Code provision overrode the more general Property Code section. Unfortunately, the Orange County decision raised more questions than it clearly answered, and three justices dissented from the majority vote. In the absence of a specific provision such as the one that applied in Orange County, it would be most prudent to expect the Property Code provision to apply. The Benton court emphasized that its problem with the wage deduction to offset a previous wage overpayment stemmed from the employer's unilateral action in making the offset, i.e., without a clear prior agreement from the employee that such a deduction could be made. The implication is that if an employer complies with the Texas Payday Law and obtains the employee's written authorization to make such a deduction from wages, neither the Benton case, nor Section 42.001(b)(1) of the Property Code, would stand in the employer's way. Concerning the FLSA, minimum wage would not be a problem, since the wage overpayment would fall into the same category as loans or wage advances (confirmed in a DOL letter ruling dated March 20, 1998 (1998 WL 852662) and in a similar ruling dated October 8, 2004 (see opinion letter FLSA2004-19NA at http://www.dol.gov/whd/opinion/FLSANA/2004/2004_10_08_19FLSA_NA_recoup.htm)). Thus, as long as the employer is able to document the employee's receipt of such wages in advance of the date the wages were due, it should have no FLSA problem in making that sort of wage offset, even if it takes the employee's pay below minimum wage. However, since it represents a deduction from wages, it would need to be authorized in writing by the employee in order to be valid under the Texas Payday Law. In addition, every employer should cover this subject in a written policy (see the sample wage deduction authorization agreement and sample wage overpayment/underpayment policy at the end of the "A - Z" section of this book).

 

A sample policy regarding wage overpayments (and an employee's duty to return them to the employer) appears in the sample forms and policies section of this book (section II of the A - Z of Personnel Policies).

 

Deductions for Interest    Top of Page

 

Some employers loan money to their employees and charge interest on the outstanding balances. Charging interest on such loans is legal, as long as the interest rate itself does not violate state usury laws. As noted above, the employer may deduct installment payments from the employees' paychecks that include both principal and interest as long as the employee has authorized such deductions in writing for purposes of the Texas Payday Law. There would be a problem under the FLSA, however, with a deduction for interest that resulted in an employee's effective hourly rate going below minimum wage for a particular workweek. Interest charged on such a loan would amount to a profit on the transaction, and the FLSA and accompanying regulations clearly state that the employer may take only the "reasonable cost" of facilities (including loans) as a credit against minimum wage, not anything over and above that which would constitute a profit.

 

To the extent that a deduction for interest does not violate the minimum wage laws, an employer is allowed to make such a deduction as long as the employee has authorized it in writing in accordance with the Texas Payday Law.

 

Deductions for Administrative Fees    Top of Page

 

Texas law authorizes an employer to make certain deductions from pay for costs incurred in servicing a garnishment or wage attachment order. These are known as administrative fees. They include:

  1. Court-ordered child support - an employer may make a deduction for an "administrative fee" of up to $10.00 per month - see V.T.C.A. Family Code, Section 158.204;

  2. Court-ordered spousal maintenance (alimony) - an employer may make a deduction for an "administrative fee" of up to $5.00 per month - see V.T.C.A. Family Code, Section 8.204; and

  3. Guaranteed student loan wage attachments - 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).

 

The FLSA, the regulations, and the Field Operations Handbook are silent on whether a deduction for an administrative fee associated with an otherwise legal deduction may itself take the employee's pay below minimum wage. However, the list of allowable deductions in Part 531 of the regulations is very exclusive. The fee would not be any kind of "facility", since it could not fairly be said to benefit the employee in any way. Hence, the Field Operations Handbook provisions allowing certain administrative costs associated with "facilities" to be deducted from minimum wage would be of no help. The regulations allowing deductions for garnishments ordered by courts or required under law do not mention anything about associated administrative fees, and the Field Operations Handbook is likewise silent on that topic. Significantly, attorney's fees incurred by an employer in association with a garnishment order may not be deducted from the employee's pay, if such a deduction would take the employee below minimum wage (Wage-Hour Opinion WH-84, October 12, 1970). The best course of action is to assume that DOL would not permit such a deduction from minimum wage, since administrative fees are merely permissible under state law, not required under either state or federal law. Since it would not be allowed under the FLSA, it would not be for a "lawful purpose" and would also violate the Texas Payday Law.

 

According to the current legal interpretation by TWC's Labor Law Department, as long as a deduction for one or more of the above administrative fees does not violate the minimum wage laws, the employer does not need written authorization from the employee, since the above state laws specifically supply such authorization. Of course, the employer should keep detailed documentation to support the amounts deducted. However, since the Labor Law Department's interpretation does not have the same force and effect that a formal rule, a Commission precedent, or an Attorney General Opinion would have, employers may well want to practice caution and include the above administrative fees in whatever standard wage deduction authorization agreement the company uses.

 

Deductions for Other Costs to the Employer    Top of Page

 

In general, almost all costs that an employer might incur in providing a workplace for and meeting various needs of its employees, in complying with workplace regulations that impose a duty on the employer (such as supplying employees with safety equipment required under OSHA regulations), and in paying for the expenses of an ongoing business operation, will be regarded as part of the normal cost of doing business that may not be deducted from an employee's wages to the extent that it would take the employee's pay below minimum wage, or result in payment of less than one and one half times the regular rate of pay for any overtime hours. The general rule is found in DOL wage and hour regulation 29 C.F.R. 531.32(c). That provision notes that expenses for things that are primarily for the benefit and convenience of the employer are not considered "other facilities" and thus may not be credited toward payment of the minimum wage. Regarding overtime pay, 29 C.F.R. 531.37(b) states "[w]here deductions are made from the stipulated wage of an employee, the regular rate of pay is arrived at on the basis of the stipulated wage before any deductions have been made." Subsection (a) of the same regulation provides that the deduction for expenses may "not exceed the amount which could be deducted if the employee had only worked the maximum number of straight-time hours during the workweek." Together, those two provisions mean that even if the employee is paid more than minimum wage, deductions for expenses incurred for the employer's benefit and convenience may be made down to minimum wage only for the non-overtime hours; overtime hours must be compensated at one and one half times the full regular rate of pay. The general rule is outlined in several provisions of DOL's Field Operations Handbook (FOH) in Chapter 30 (Minimum Wage):

 

DOL Field Operations Handbook (excerpts)

30c03 Primarily for the benefit of the employee.
(a) The crediting by an employer of facilities furnished to employees as wages will depend upon whether such facilities are furnished primarily for the benefit or convenience of the employee, as determined by WH. Where the primary benefit of such facilities is to the employer's business interest, credit will be denied. The following are commonly viewed as furnished primarily for the benefit or convenience of employees:

(3) Transportation

a. ... transportation which is an incident of or necessary to the employment is not an "other facility".

30c04 Primarily for the benefit of the employer.
The following are examples of items not considered bona fide "other facilities" under Section 203(m) and Part 531 [of the regulations], because they are provided primarily for the benefit or convenience of the employer:

  1. Electric power used for commercial production in the interest of the employer.
  2. Telephones used for business purposes.
  3. Taxes and insurance on the employer's building which is not used as lodging furnished to the employees.
  4. Medical services and hospitalization which the employer is obligated to furnish under workers' compensation law or similar Federal, State, or local laws.
  5. Rental of uniforms where the wearing of a uniform is required by law, the employer, or by the nature of the work.
  6. Business-related travel expenses. (See 29 C.F.R. 778.217.)
  7. Necessary tools or uniforms used in the employee's work.

30c13 Deductions from wages of migrant and seasonal agricultural workers.
(d) - In Marshall v. Glassboro Service Association, Inc., the Third Circuit affirmed the district court's judgment that money advanced to farm workers for transportation costs from Puerto Rico to the mainland was primarily for the benefit of the employer and therefore could not be deducted from the workers' wages to the extent it reduced the wages below the statutory minimum. ... The U.S. Supreme Court denied review. The Court of Appeals also ruled that, regardless of the manner or method by which the employer sought to pass on to its employees certain transportation costs, where the effect was to bring the wage rate below the statutory minimum, such practice was unlawful.

[Note: several other provisions of Section 30c13 emphasize the same principle; even though the section is nominally titled as having to do with seasonal and migrant workers, it is clear that the same principle would apply to any worker covered by the FLSA minimum wage provision.]

 

The only exceptions to this general rule are found in DOL's FOH Sections 30c05 and 30c06 and have mainly to do with things like depreciation and operational costs attributable directly to meals, lodging, and other facilities. DOL wrote in an opinion letter dated January 21, 1997 that "it is our longstanding position that the cost of uniforms and safety equipment required by the employer is a business expense of the employer. Thus, even if the employees purchase these items, this cost may not reduce their wages below the minimum wage, nor decrease their overtime compensation." The same rule would apply to drug and alcohol testing costs; since such costs are usually borne by the employer, wage deductions for such expenses may not take the employees below minimum wage. A DOL opinion letter of September 10, 1998 noted that an employer does not have to pay mileage expenses employees incur during work, "so long as at least the full minimum wage is paid free and clear for all hours worked." That position coincides with the rule cited in DOL opinion letters WH-92 of November 10, 1970 and WH-531 of June 27, 1990 that expenses relating to transporting employees during a workday may not be counted toward minimum wage, i.e., the employer must both pay the full minimum wage and reimburse any out-of-pocket transportation expenses that would effectively reduce the employees' pay below minimum wage if left unreimbursed. As noted in the topic on direct deposit of expense reimbursements, such reimbursements are not counted as part of wages (see also the topic on "Expense Reimbursements"). In general, any employer contemplating such deductions should definitely consult with legal counsel before proceeding.

 

To the extent that a deduction for a miscellaneous cost to the employer does not violate the minimum wage laws, an employer is allowed to make such a deduction as long as the employee has authorized it in writing in accordance with the Texas Payday Law.

 

Wages in Kind    Top of Page

 

An employee whose wages are paid in part with meals furnished in connection with the job, by being able to live in housing provided by the employer, or with "other facilities" is considered to be paid "in kind". Special considerations apply when wages are paid in kind. Section 61.016(a) of the TPL states that wages shall be paid either in cash, by a check that is negotiable for cash at the full face value, or by electronic funds transfer. Section 61.016(b) states that payment of wages "in kind or in another form" is acceptable if the employee has agreed in writing to take the wages in such a manner. The Texas Payday Law thus takes a stricter position than the prevailing court decisions under the FLSA take, i.e., under the state law, written acceptance of lodging as part of wages is required, whereas under the federal law, employee acceptance is not required. Thus, even if a deduction or credit for lodging costs that would reduce an employee's pay below minimum wage or cut into an employee's overtime pay might be legal under the FLSA, the employer would still have to have the employee's written consent to receive part of the wages in the form of meals or lodging in order to comply with the state wage payment law. The Texas Workforce Commission, which enforces the TPL, also takes the position that to be valid, the lodging deduction must also comply with the federal recordkeeping standards found in Part 516 of the federal wage and hour rules, most specifically, section 516.27.

 

The written authorization for wages paid in kind may appear as part of a standard wage deduction authorization form that lists all the various wage deductions that will be made.

 

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