The New York State Department of Labor (NY DOL) issued an opinion letter earlier this year in which it ruled that, given the very narrow circumstances in which an employer can deduct amounts from an employee's wages, the employer, which had substantially overpaid an employee's wages, was not permitted to deduct the overpayment from the employee's future wages, even if the employee consented to the deduction. Instead, the NY DOL ruled that the employer's only option was to pursue a separate claim against the employee for the amount due. The opinion letter is a reminder for all employers, regardless of where they do business, of the need to review and comply with laws and regulations restricting deductions from pay.

Section 193 of the New York State Labor Law prohibits any deductions from wages except those made (1) in accordance with any other  law, or (2) for the benefit of the employee and authorized in writing by the employee. The latter deductions are limited to payments for insurance premiums, pension or health and welfare benefits, contributions to charities, payments for U.S. savings bonds, payments for union dues and assessments, and "similar payments for the benefit of the employee."

Section 193 further provides that the employer cannot require the employee to make any payment by a separate transaction that would be prohibited as a deduction. Finally, the New York Labor Law limits the total permitted deductions that can be made to 10 percent of the employee's total wages.

In the case before the NY DOL, the employer had overpaid the employee for more than 12 months and was seeking advice on whether it could enter an agreement with the employee by which the employee authorized the employer to recoup the overpayments by deducting certain amounts from the employee's paychecks. Relying on both the limiting language of Section 193, as well as a decision from the New York Court of Appeals (the highest appellate court in New York), Angello v. Labor Ready, 7 N.Y. 3d 579 (2006), the NY DOL determined such an agreement would violate the law.

The NY DOL noted that in Labor Ready, the Court of Appeals held that the language in Section 193, which permits deductions for "similar payments," was limited to payments where the employee derived a monetary benefit (e.g., savings bonds) or were supportive of the employee (e.g., insurance). Therefore, the court held that any payment that went directly to the employer would be prohibited.  

The NY DOL next noted that Section 193 bars an employer from entering into an agreement with the employee that would be prohibited as a deduction — that an employer and an employee cannot enter into a separate agreement for the employee to pay the employer "x" dollars per week, nor can the employer discipline the employee for refusing to enter into such an agreement. Instead, according to the NY DOL, the employer could seek relief only by instituting legal action against the employee.  

Employers that have employees subject to New York wage payment laws should closely examine any wage deductions that are not explicitly authorized by Section 193. For example, deductions from wages of employees who have taken, broken or lost product or equipment belonging to the employer are unlawful. Even deductions for employees who have been paid an advance or received a loan appear to be unlawful because the money is being paid directly to the employer.

A closer question is presented where the employee authorizes a wage deduction to repay a loan from the employee's 401(k) or other type of savings plan. In that case, the money is not being paid directly to the employer. Instead, because the money is being transferred to the employee's pension or savings plan for the benefit of the employee, a strong argument can be made that the employee is receiving a monetary or supportive benefit, which would be permitted under Section 193; however, the deduction still must fall within the 10 percent cap.

While New York has a very restrictive law on deductions from wages, the NY DOL's opinion letter is a wake up call for employers in all states. Most states limit when money can be deducted from an employee's wages and frequently set forth procedures that must be followed before a deduction can be made. Therefore, it is important to confirm that  a wage deduction or other arrangement is permissible under the applicable law before deducting it from an employee's pay — the fact that the employee consented to the deduction may not be enough make it a legal deduction.