HR Support on Payroll Deductions

Editor's Note: Both federal and state laws govern employee pay deductions.

Rena PirsosOverview: In addition to withholding amounts from employees' wages that are required by law - such as income and employment taxes - employers also make many other types of employee pay deductions. To stay in compliance with applicable laws and rules, employers should be well versed in all types of deductions.

For instance:

  • Involuntary Deductions. Employers are often ordered by either a court or a government agency to make deductions from employees' wages to satisfy a debt. Involuntary deductions often must be implemented immediately upon receipt, the amount that may be deducted is limited by the Consumer Credit Protection Act, and employers are subject to serious penalties if they do not comply with such orders. Involuntary deductions include those for federal tax levies, child support withholding orders, bankruptcy orders, and creditor, student loan and federal agency loan garnishments.
  • Voluntary Deductions. Employees often voluntarily choose to have their employer make certain pay deductions on their behalf. Voluntary deductions are primarily governed by state laws that specify the types of deductions that are permitted and prohibited, as well as the circumstances under which they may be made. The most commonly requested types are wage assignments, union dues, US savings bonds and charitable donations.
  • Other Deductions. Most states' laws permit employers to make various other types of employee pay deductions so long as the employees agree to them and their net pay is not reduced below the minimum wage or overtime pay requirements of the Fair Labor Standards Act (FLSA) as a result. Some state laws also specifically prohibit certain types of deductions and impose penalties for violations. Employers must check the law of each state in which they pay employees to be certain of what may and may not be deducted. Some examples of deductions that may be permitted or prohibited are: (i) the cost of a medical exam taken as a condition of continued employment; (ii) payments for insurance premiums, pension benefits, or health and welfare benefits under a collective bargaining agreement; (iii) the cost of breakage or spoilage of materials; (iv) cash shortages; (v) uniforms required by the employer; and (vi) deductions to repay a company loan or cash advance.

Author: Rena Pirsos, JD, Legal Editor

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