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Wage deduction agreements and the FLSA

published in McAfee & Taft EmployerLINC | June 24, 2019

Many employers require their employees to bear certain employment-related costs. For instance, an employer might require its employees to purchase work uniforms, safety glasses or other items for use in the workplace. Employers and employees often enter into the following arrangement regarding such costs: the employer will provide the items to the employee and the employee will reimburse the employer at a later date. This arrangement is often facilitated by the employee signing a Wage Deduction Agreement. A Wage Deduction Agreement authorizes an employer to deduct specified amounts from the employee’s pay check.

As an initial matter, employers should be aware that under Oklahoma law an employer must have a signed written agreement from the employee in order for most wage deductions to be lawful. Oklahoma law only permits deductions, other than those mandated by a statute or court order, for the following purposes:

  1. to repay a loan or advance which the employer made to the employee during the course of and within the scope of employment or for the recovery of payroll overpayment;
  2. to compensate the employer for the value of merchandise or uniforms purchased from the employer by the employee;
  3. to provide payment for medical, accident, disability, or retirement benefits or insurance premiums, not including workers’ compensation or unemployment compensation;
  4. to provide for contributions to a deferred compensation plan or other investment plan;
  5. to compensate the employer for breakage or loss of merchandise, inventory storage, or cash shortage caused by the employee, provided the employee was the sole party responsible for the breakage or loss.

Unfortunately, many employers fall into the trap of thinking that once they obtain a valid Wage Deduction Agreement the analysis is complete. But employers beware! The Fair Labor Standards Act is always lurking in the shadows when pay-related issues are at hand.    

Under the FLSA, the general rule is that wage deductions for items/payments that are considered primarily for the benefit or convenience of the employer may not reduce an employee’s rate of pay to below the minimum wage.  Let’s take the example mentioned above in which an employer provides a uniform to the employee and has the employee sign a Wage Deduction Agreement to reimburse the employer for the cost of the uniform.   For the purposes of this example, assume the following: the uniform costs $50, the employee’s rate of pay is $7.25 per hour (the current minimum wage), and the employee works 40 hours per workweek resulting in his pay being $290 per workweek ($7.25 x 40).

Compliance with the minimum wage requirement is determined by dividing the total wages paid to the employee by the total number of hours worked in the workweek. In our example, if the employer deducts $50 from the employee’s pay for one workweek, that would result in the employee being paid $240 for 40 hours of work, which would make his effective rate of pay $6.00 per hour.   Accordingly, such a wage deduction would be a violation of the FLSA’s minimum wage requirement.  In fact, in this scenario, the employer may not deduct any amount from the employee’s wages because doing so would reduce the employee’s rate of pay to below the minimum wage.

Notably, the employer cannot circumvent this problem by requiring the employee to go out and buy the uniform himself.  Doing so would be viewed the same as reducing his pay by the cost of the uniform.

Now, let’s say the employee’s rate of pay is $7.75 per hour and he works 40 hours per week, resulting in his pay being $310 per week.   In this scenario, the employer could legally deduct up to $0.50 for every hour the employee worked in a work week because doing so would not reduce his rate of pay to below $7.25 per hour.  So, if the employee worked 40 hours in a week then the maximum amount the employer could deduct for that week would be $20 ($0.50 x 40).  If the employee worked 30 hours in a week, then the maximum amount the employer could deduct would be $15 ($0.50 x 30).   The employer could deduct the maximum amount each week for however many weeks it takes until the uniform cost was fully reimbursed.

If a wage deduction benefits the employee, and the employer derives no profit or benefit from the deduction, then it is permissible to make a deduction that reduces the employee’s effective rate of pay below the minimum wage.  There are other specific scenarios where deductions are permissible even if they drop the effective rat of pay below the minimum wage, including deducting federal, state, and local taxes the employee is required to pay, certain scenarios regarding meals and living quarters, and certain deductions related to loans made by the employer to the employee.    Most of those exceptions are fact specific, based on the circumstances at hand.

The same general rule applies to wage deductions and overtime compensation.  If the wage deduction is for the benefit of the employer, it is not permissible if it reduces an employee’s overtime rate of pay (i.e., pay for work in excess of 40 hours in a work week) to below time-and-a-half.

Therefore, employers should proceed with caution when utilizing Wage Deduction Agreements to ensure that an employee’s effective rate of pay is not reduced to below the minimum wage requirement or the time-and-a-half pay requirement for overtime.