Why You Cannot Withhold Payment from Employees

Paying employees is among the top legal obligations of employers. Whether due to financial difficulties or worker conduct, it is generally illegal to withhold payment from employees. The U.S. Department of Labor (DOL), as well as state labor boards, have strict laws that address wages. Failure to pay employees could result in a lawsuit, an injunction, civil penalties, or even criminal penalties.

There are limited instances when withholding pay is permitted. Given the strong worker protection laws on the books and the punishments that employers can face for not paying employees on time and in full, employers should not attempt to withhold pay without consulting legal counsel.

Laws Against Not Paying Employees

The Wage and Hour Division (WHD) of the DOL is tasked with ensuring that workers are properly paid for all the hours they work. It is a duty that the agency takes seriously. In the fiscal year 2019, the WHD recovered a record $322 million in wages owed to workers.

The DOL is proactive in its efforts to “help job creators understand their responsibilities under the law,” holding thousands of educational outreach events per year.

Those responsibilities include complying with the following workers’ rights:

• The right to prompt pay
• The right to receive a final paycheck promptly after leaving a job
• The right to collect ordered back pay
• The right to not have pay docked for poor performance or as punishment
• The right to be paid for all compensable hours

State Labor Laws

In addition to DOL laws, states have their own laws on paying employees that may be different and stricter than federal laws. Employers must comply with the law that provides the greater benefit to employees. Check with your state’s labor office (Texas Workforce Commission) or consult with a local employment attorney to make sure you understand what’s required.

Exempt vs. Nonexempt Employees and the FLSA

Many of the DOL’s regulations are promulgated under the Fair Labor Standards Act (FLSA). Importantly, the FLSA differentiates between “exempt” and “non-exempt” employees. Exempt employees are salaried workers who receive the same amount of pay for each pay period regardless of the number of hours worked. Exempt employees, who are not covered by the FLSA, must receive certain minimum levels of compensation ($684 per week [$35,568 annually] as of 1/1/2020) and certain job criteria tests such that they typically include professionals, administrative personnel, upper-level positions, such as executives and outside sales personnel.

The primary difference between exempt and nonexempt employees has to do with overtime pay. However, the FLSA can also affect pay docking and other aspects of employment. For example, some types of pay docking are permissible for exempt employees but not permitted for nonexempt employees. This includes salary reductions for violating a written policy. Improper pay docking could subject an employer to penalties and jeopardize a worker’s exempt status.

Payments that Employers May Legally Deduct

Employers are permitted to make certain deductions from employee paychecks. Legal deductions include the following:

• Required deductions such as state and federal taxes, Social Security contributions, and court-ordered wage garnishments
• Agreed-upon deductions such as pension and health insurance contributions, lodging and meals, union dues, and charitable contributions; note that these deductions must be agreed to in writing
• Accounting errors (e.g., paying an employee the wrong wage or for the wrong number of hours), which can usually be recouped by the employee out of a future paycheck as long as the deduction does not put the employee below minimum wage
• Deductions to pay back a debt such as a payday loan, with an employee’s written permission, even if they reduce a worker’s pay to below minimum wage

When You Might Think You Can Withhold Pay (But It’s Probably Illegal)

It might seem as though an employer should be entitled to withhold payment in some situations. For the most part, though, employers should think twice before withholding payment, even in these situations:

• A terminated employee fails to return company equipment. Both state and federal laws mandate when a terminated employee must receive final payment, and there are no exceptions that pertain to unreturned equipment, so payment cannot be withheld past the date specified by law, even if the employee has failed to return company equipment. For nonexempt employees, depending on state law, an employer may be able to deduct the cost of unreturned equipment with written authorization.
• An employee is believed to be the cause of a cash shortage. You cannot simply pay an employee less if you suspect they are the reason for a cash shortage. Although federal law does not prohibit deductions for shortages, most states do. You may be able to discipline an employee for not following company procedure or take them to court and prove they took the money. Under limited circumstances, deductions for cash shortages can be made from employees who consented to them in writing, provided that the deduction does not put the employee below minimum wage. The same rules also apply to property damage and the acceptance of bad checks.
• An employee takes breaks. There is no federal law mandating lunch, meal, or break periods, but some states require meal periods. Employers that choose to offer these breaks do not have to pay employees for genuine breaks that last thirty minutes or more. Shorter permitted breaks of around five to twenty minutes are compensable. Employers that offer coffee breaks cannot dock workers who take them.
• Training Time. If an employer requires an employee to attend training or other meetings, they must compensate the employee for the time spent in such meetings or training.

Penalties for Not Paying Employees

Employees that believe their pay was improperly withheld can complain to the DOL and their state labor office. A complaint can lead to an employer investigation and several different enforcement actions.

The DOL may take the following actions:

• File a lawsuit on behalf of employees for back wages, liquidated damages, and civil money penalties
• Seek an injunction from a U.S. district court
• Seek an order from an administrative law judge for payment of civil money penalties

In addition, employees may file a private lawsuit to recover back wages, liquidated damages, attorneys’ fees, and court costs. Employers that willfully violate the law could also be subject to criminal penalties, including fines and imprisonment. Furthermore, employers are prohibited from retaliating against employees who report potential payment violations.

Do not let a minor payment dispute escalate into a major wage and hour lawsuit. When in doubt about who is in the right—you or your employee—do not hesitate to reach out to our office for employment law advice.

The following is provided for informational purposes only and is not, nor should it be construed as legal advice. Gregg M. Mielke is a fellow member of the College of the State Bar of Texas and has been practicing for over 30 years concentrating his practice in the areas of business formation and operations, construction, and commercial real estate.