Deductions for Loans or Advances
The only deductions permitted from minimum wage for debts owed by employees to employers are advances and loans. In situations where an employer pays a third party at the employee's request, this is equivalent to a loan to the employee or an advance against salary and the courts treat this as if the employee has been paid “free and clear.” Therefore, the deductions to recoup the amount of the loan are permissible under the Fair Labor Standards Act (FLSA).
However, a different rule applies where the employee owes a debt directly to the employer. In this situation, because of the employment relationship between the two parties and the superior bargaining power of the employer, the voluntary assignment of wages is inherently suspect. The general rule in such a case is that an employer may not make otherwise impermissible deductions based on a “voluntary” assignment of wages. For example, an employer may not make deductions from an employee's wages to recoup business losses even if the employee voluntarily agrees to the deductions. In other words, the protection afforded by the FLSA may not be waived by agreement between the employer and employee.
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As recognized by the Fifth Circuit, where the employer is owed a debt from the employee which has arisen from a non-loan transaction there are special considerations because of the superior bargaining power of the employer. In such a case, “payment may not be made by paycheck deductions which reduce net pay below minimum wage, even where the employee apparently consents to such an arrangement.”
Deductions made at the direction of an employee to a third-party
Finally, an exception is also applicable to situations where a deduction is taken to pay third-party creditors of the employee at the direction of and with the consent of the employee or to repay amounts already paid out to third parties upon an arrangement made with the employee. According to the Secretary's regulations under the Act, where an employer is directed by a voluntary assignment or order of his employee to pay a sum for the benefit of the employee to a creditor, donee or other third-party, deductions from wages of the actual sum so paid is not prohibited; provided, that neither the employer or any person acting in his behalf or interest, directly or indirectly, derives any profit or benefit from the transaction.