Wage Deductions Under Massachusetts Law
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Most employers know that the Massachusetts Wage Act requires timely payment of all wages. What many do not understand are the limitations on what can be deducted from employee paychecks. The truth is very few deductions from pay are allowable under state law. Improper deductions could be a violation of the Wage Act and subject the employer to triple damages.
The Wage Act allows for a "valid set-off" from wages due to employees paid a salary or hourly wage. With respect to commission payments, it also states that such payments must be made "less allowable or authorized deductions." Deductions that further the employer's interest and not the employee's are not allowed under the Wage Act. An employer may deduct for standard items like union dues, income taxes, or health insurance premiums. These are separately authorized by statute, and also further the interest of the employee. In contrast, payroll deductions to cover other expenses like the cost of uniforms or other equipment that should be part of the employer's overhead expenses are probably not allowed. |
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Common Wage Deduction Issues
Taxes and Benefits
There are certain things an employer is required to withhold from wages, including federal and state income taxes and social security taxes. These amounts must be deducted from your gross wages and paid to the appropriate taxing authority by the employer.
As an employee, the only way to manage the amount of tax withholdings is through the number of exemptions you claim on your Form W-4. The more exemptions you claim, the less will be withheld, but you may end up owing money if insufficient funds were withheld.
Employers also may take deductions for pre-tax payments for employee benefits, like health, life, and dental insurance.
As an employee, the only way to manage the amount of tax withholdings is through the number of exemptions you claim on your Form W-4. The more exemptions you claim, the less will be withheld, but you may end up owing money if insufficient funds were withheld.
Employers also may take deductions for pre-tax payments for employee benefits, like health, life, and dental insurance.
Employee Liabilities or Obligations
Sometimes an employee has a financial obligation to the employer. This could arise if the employer lends the employee money. It can also arise if the employee damages the employer's property. For example, if the employee's work involves driving a company vehicle, the employer may have a policy that the employee is responsible for any damage they cause to the vehicle.
In both cases, the employer can hold the employee responsible for the amount owed. But they may not be able to simply help themselves to those funds by deducting them from employee pay.
First, the employee's obligation has to be determined by some form of due process. A company cannot simply declare that an employee was at fault for a car accident. Before it can deduct the cost from the employee's wages, there must be some neutral determination of fault.
Second, the basis for the deduction must be clear and agreed to. Without a written policy about responsibility for damage to property, a wage deduction for damage may be subject to challenge.
Employee loans are also tricky. Even with a clear written agreement signed by the employee, the employer has to be very careful. There are limits on the amounts that can be deducted, and specific requirements for loans over $2,000. Finally, there is surprisingly little case law on the subject of deductions for employee loans. This means that there is always some risk that a court would find deductions from employee wages for this purpose unlawful.
In both cases, the employer can hold the employee responsible for the amount owed. But they may not be able to simply help themselves to those funds by deducting them from employee pay.
First, the employee's obligation has to be determined by some form of due process. A company cannot simply declare that an employee was at fault for a car accident. Before it can deduct the cost from the employee's wages, there must be some neutral determination of fault.
Second, the basis for the deduction must be clear and agreed to. Without a written policy about responsibility for damage to property, a wage deduction for damage may be subject to challenge.
Employee loans are also tricky. Even with a clear written agreement signed by the employee, the employer has to be very careful. There are limits on the amounts that can be deducted, and specific requirements for loans over $2,000. Finally, there is surprisingly little case law on the subject of deductions for employee loans. This means that there is always some risk that a court would find deductions from employee wages for this purpose unlawful.
Garnishment or Liens
Sometimes an employee is subject to a court ordered garnishment of his or her wages. This can be for things like child support or outstanding civil judgments. An employer may deduct pursuant to a valid garnishment order.
There are strict limits to the amount that may be garnished. This should be reflected in the order itself, but if you are an employer who receives a garnishment order you may want to consult with counsel to make sure you are compliant with the order and the law.
There are strict limits to the amount that may be garnished. This should be reflected in the order itself, but if you are an employer who receives a garnishment order you may want to consult with counsel to make sure you are compliant with the order and the law.
Training or Signing Bonus Reimbursement
Sometimes employers require a new employee to sign an agreement to repay certain amounts on termination. For example, a company who pays an employee's relocation expenses may require the employee to agree to repay some or all of those expenses if they resign within a certain time period. The same could be true for amounts paid for initial training, or a signing bonus.
These agreements are valid to the extent they create an obligation for the employee. It is less clear that the employer can recoup those funds by unilaterally withholding them from a final paycheck (see discussion above about employee obligations).
These agreements are valid to the extent they create an obligation for the employee. It is less clear that the employer can recoup those funds by unilaterally withholding them from a final paycheck (see discussion above about employee obligations).
The Special Case of Commission Based Employees
Commissions are considered wages for purposes of the Wage Act. They are a little more difficult to define than a salary or an hourly wage, as every employer has different commission plans. Further, the Wage Act expressly states that commissions are payable "less allowable or authorized deductions."
To illustrate some of the uncertainty about deductions from commissions, consider the following examples.
A hair salon pays its stylists a commission for each customer served. The commission is calculated by a percentage of the revenue, minus a $2.00 charge to cover the cost of the product used in the salon. If the stylist were paid an hourly wage, this deduction would most likely not be valid. This is because the cost of the product is more like the cost of a uniform or other equipment and should be part of the employer's overhead. The hair salon might argue that it is simply how the commission is calculated, therefore the product charge is an "allowable or authorized deduction."
Another common example are employees whose commissions are based on margin rather than gross revenues. "Margin" means the employer is reducing the starting number by its own expenses. In the context of an hourly wage employee this would clearly be inappropriate. But it is a commission calculation that many employers use and would defend as an "allowable or authorized deduction."
Massachusetts courts have not yet answered either of the above questions. If you are paid on a commission, or if you are an employer who has commission-based employees, you should consider consulting an employment lawyer.
To illustrate some of the uncertainty about deductions from commissions, consider the following examples.
A hair salon pays its stylists a commission for each customer served. The commission is calculated by a percentage of the revenue, minus a $2.00 charge to cover the cost of the product used in the salon. If the stylist were paid an hourly wage, this deduction would most likely not be valid. This is because the cost of the product is more like the cost of a uniform or other equipment and should be part of the employer's overhead. The hair salon might argue that it is simply how the commission is calculated, therefore the product charge is an "allowable or authorized deduction."
Another common example are employees whose commissions are based on margin rather than gross revenues. "Margin" means the employer is reducing the starting number by its own expenses. In the context of an hourly wage employee this would clearly be inappropriate. But it is a commission calculation that many employers use and would defend as an "allowable or authorized deduction."
Massachusetts courts have not yet answered either of the above questions. If you are paid on a commission, or if you are an employer who has commission-based employees, you should consider consulting an employment lawyer.
Best Practices for Payroll Deductions
Both state and federal laws protect an employee's right to wages. Both also have strict and punitive consequences for an employer found in violation of them. For this reason, it is important to be careful as an employer. Below are some best practices you should consider.
Have written documentation for everything, including common and accepted deductions. For deductions for income tax, make sure your employees have signed a W-4 form authorizing the deduction. For health insurance premiums or union dues, you should also make sure there is signed paperwork in the employee's file.
Try to avoid lending employees money. There are lots of reasons this is a bad idea from a business perspective. It can also potentially create liability under the Wage Act if you try to collect by deductions from employee wages.
Do not structure your commission payments with deductions for expenses in the calculation. You are better off to consider the overall expense when determining what percent commission you will pay overall.
Have written documentation for everything, including common and accepted deductions. For deductions for income tax, make sure your employees have signed a W-4 form authorizing the deduction. For health insurance premiums or union dues, you should also make sure there is signed paperwork in the employee's file.
Try to avoid lending employees money. There are lots of reasons this is a bad idea from a business perspective. It can also potentially create liability under the Wage Act if you try to collect by deductions from employee wages.
Do not structure your commission payments with deductions for expenses in the calculation. You are better off to consider the overall expense when determining what percent commission you will pay overall.
How Our Employment Lawyers Can Help
We can help you understand your rights and obligations with respect to payroll deductions. You can use the button below to schedule a call back from a member of our team, give us a call at 781-784-2322, or fill out our web form to let us know a little more about your situation.
