Deducting Negative Leave Balances From Final Wages
The general consensus is that under federal law employers can deduct negative paid leave balances from an employee's final wages. However, it would benefit you to look deeper, as there are subtleties at play.
Deducting Negative Leave Balances From Nonexempt Employees' Wages
The U.S. Department of Labor has long held the position that an employer can deduct a loan or advance of wages made to an employee from that employee's wages, even if the deduction causes their pay to drop below the minimum wage. When nonexempt employees take paid leave despite exhausting their available time off, they are, in effect, receiving an advance of wages.
As indicated in a DOL opinion letter (FLSA2004-17NA), deductions for advanced paid leave from nonexempt employees' final wages are permissible as long as both:
- The unearned vacation/leave policy was communicated to employees prior to them receiving the paid leave advance.
- The advanced paid leave is deducted at the same hourly rate that was paid to employees when they received the advance.
Although this deduction is permitted by federal law, state law may differ. For example, the state may allow deductions for paid leave advances from final wages if the employee has voluntarily signed an agreement to pay back the advance. Or it may forbid the deduction altogether.
Deducting Negative Leave Balances From Exempt Employees' Wages
Generally, salaried employees who are exempt from the Fair Labor Standards Act's minimum wage and overtime pay provisions must receive their full salary for any week in which they did any work, regardless of how many days or hours they worked.
The FLSA has specific conditions under which deductions can be made from these employees' salary. Among them are the following three circumstances:
- The employee is away from work for one or more full days because of sickness or disability, providing the deduction is done according to a bona fide sick leave or disability plan, policy or practice.
- The employee is away from work for one or more full days because of personal reasons, excluding sickness or disability.
- During the first or final week of employment if the employee fails to work the entire week.
FLSA-permissible deductions from an exempt employee's pay must be made in full-day increments. Therefore, deductions for paid leave advances from an exempt employee's salary can be done only for full days taken, not for partial days taken.
As stated in Section 541.602(b) of the FLSA: "Deductions for such full-day absences also may be made before the employee has qualified under the plan, policy or practice, and after the employee has exhausted the leave allowance thereunder."
These deductions are permitted, provided the guaranteed weekly salary is maintained as required by the FLSA.
Note that Section 541.602(b) of the FLSA does not specifically say whether deductions for paid leave advances can be made from an exempt employee's final paycheck. Therefore, should this situation arise, be sure to seek legal counsel. Also, keep in mind that some states have rules on deducting from exempt employees' pay.