Can you withhold money from an employee because he made a mistake or caused damage to your business? Yes, but only if the loss, and you, meet certain conditions.

It has been common practice for businesses to withhold money from an employee’s paycheck when the business determines that the employee has done something to harm the company. This may include situations where the employee broke a piece of equipment, caused a customer to return to the business for a repair, or took some action that caused damage to customer or third-party property. However, even if you have a policy providing for employee payment for these types of losses, there are limitations on your ability to make a deduction from the employee’s paycheck.

Massachusetts General Laws chapter 149, section 148 governs payment of wages to employees. Section 150 of the statute provides that an employer may withhold wages if there is a “valid set-off”. The problem is interpreting whether the set-off is valid.

In a recent case, Camara v. Attorney General, 2011 Mass. LEXIS 16 (Mass. Jan.25, 2011) the Massachusetts Supreme Court held that the Wage Act prohibits an employer from making deductions from earned wage based solely on its own determination that the employee was responsible for the monetary damage. Loan repayments of undisputed amounts and/or wage advances are still acceptable deductions, providing that the employee has signed an agreement that clearly sets forth specific terms and permits the deduction. Employers must keep diligent and accurate records of monetary losses and should use an independent source to determine if the employee is responsible for the damage. Deductions from wage may only be made if the employee’s wage rate for the pay period does not drop below minimum wage.

Keep in mind that, although you may be restricted in certain situations from deducting money for losses, you maintain the right in the “at-will” relationship to discipline or terminate the employee for shoddy work, costly mistakes or failure to re-pay a loan.

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