CA UPDATE: Damaged or Lost Company Equipment: An Impermissible Deduction from Employee Wages

An employer cannot legally make a deduction from wages if, by reason of mistake or accident a cash shortage, breakage, or loss of company property/equipment occurs. The California courts have held that losses occurring without any fault on the part of the employee or that are merely the result of simple negligence are inevitable in almost any business operation and thus, the employer must bear such losses as a cost of doing business. For example, if an employee accidentally drops a tray of dishes, takes a bad check, or has a customer walkout without paying a check, the employer cannot deduct the loss from the employee’s paycheck. There is an exception to the foregoing contained in the Industrial Welfare Commission Wage Orders that purports to provide the employer the right to deduct from an employee’s wages for any cash shortage, breakage or loss of equipment if the employer can show that the shortage, breakage or loss is caused by a dishonest or willful act, or by the employee’s gross negligence. What this means is that a deduction may be legal if the employer proves that the loss resulted from the employee’s dishonesty, willfulness, or grossly negligent act. Under this regulation, a simple accusation does not give the employer the right to make the deduction. The DLSE has cautioned that use of this deduction contained in the IWC regulations may, in fact, not comply with the provisions of the California Labor Code and various California Court decisions. Furthermore, DLSE does not automatically assume that an employee was dishonest, acted willfully or was grossly negligent when an employer asserts such as a justification for making a deduction from an employee’s wages to cover a shortage, breakage, or loss to property or equipment. Labor Code Section 224 clearly prohibits any deduction from an employee’s wages which is not either authorized by the employee in writing or permitted by law, and any employer who resorts to self-help does so at its own risk as an objective test is applied to determine whether the loss was due to dishonesty, willfulness, or a grossly negligent act. If an employer makes such a deduction and it is later determined that the employee was not guilty of a dishonest or willful act, or grossly negligent, the employee would be entitled to recover the amount of the wages withheld. Additionally, if the employee no longer works for the employer who made the deduction and it’s decided that the deduction was wrongful, the ex-employee may also be able to recover the waiting time penalty pursuant to Labor Code Section 203.