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Can You Make Employees Pay for Breakage or Customer Theft?

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By Mark Wilson, Esq. on January 13, 2015 10:56 AM

In the business world, "shrinkage" (loss of inventory due to theft) and "breakage" (stuff getting broken) can eat into revenue, especially in the restaurant business. Dishes get broken, customers leave without paying -- what's a business owner to do?

It's tempting to make employees pay for that. After all, they broke the dishes. They weren't vigilant enough to catch the customers dining and dashing. It's only fair to make them pay for their negligence, right?

Except that, depending on where you are, that might be a violation of state labor laws.

Federal Law

Federal labor laws allow employers to take anything out of employees' pay that the law allows. Typically, this includes involuntary things like taxes, along with voluntary things like a retirement plan contribution or health insurance premiums.

Federal law is silent on the issue of making an employee pay for breakage, a customer's theft, or a shortage in the cash drawer. The only rule that applies to all states is that a deduction for loss can't bring the employee's hourly pay rate below the federal minimum wage for the work week. (And before you think about it, the feds have, too: Making an employee reimburse the employer for the cost is the same as automatically deducting it from a paycheck.)

State Laws

Whether you can withhold pay for the cost of shortage or breakage really depends on which state you're in. California, for example, is on the strict "no" end of this kind of law; the state's Labor Code forbids employers from docking an employee's pay because of a shortage or breakage.

However, employers can deduct such losses if the employee's actions were intentional or grossly negligent. Ordinary negligence, though, isn't enough; the risk of loss is part of the employer's cost of doing business. (Employers can still discipline an employee for such losses, but that can't include deducting the loss amount from the employee's paycheck.)

Texas is one of those states in the middle. Under Texas law, employers can deduct the cost of losses from employees' paychecks, but only with the employee's prior written authorization. The authorization has to be crystal-clear that it allows the employer to deduct such costs from the employee's paycheck, and it has to give the employee a reasonable expectation of the amount to be deducted.

Be careful, though: In states requiring written authorization, some types of losses may not even be chargeable to the employee even through a writing. In Colorado, for example, employees can be charged for property damage if there was a pre-existing written agreement, but not for a customer dine-and-dash or a shortage in the cash drawer.

On the opposite end of the spectrum from California are states like Arkansas, which have no law addressing this specific situation. The only rule there is the standard one: Deductions from an employee's pay can't reduce the employee's pay to the point that the employee was paid below the minimum wage rate for the week. (Of course, this doesn't prevent an employer from spreading the cost of loss across multiple weeks.)

The moral of the story is that before you try to withhold part of an employee's pay to offset the employee's negligence or a customer's theft, check your state laws to make sure you're not the one breaking them.

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