Question: Our employee owes us money and has told us she wants the value of her paid time off (PTO) applied to her repayment obligations. Can we do this? What is required to pull the money from her paycheck?
Answer: Unfortunately, this is not a one-size-fits all answer; state requirements may vary. For example, in Colorado, PTO is considered wages, and therefore taking the value of accrued but unused PTO will be considered a deduction from wages. Colorado (and other states) permit deductions required or authorized by law (e.g., taxes or FICA, garnishments, retirement plans). Colorado also permits deductions for loans, advances (including accidental overpayment of wages), goods, services, equipment, or property provided to an employee only if the following conditions are met: (1) the employer has the employee’s written agreement to make the deduction; (2) the written agreement is enforceable and lawful; (3) the deduction may not bring pay below minimum wage; and (4) what was provided to the employee must be for the employee’s benefit, not for an employer’s cost of doing business.
Applying these four conditions to deducting PTO for repayment obligations, the third prong is not likely implicated, but the employer needs to put the repayment authorization / deduction into a written agreement (prong one) detailing the amount and how repayment will be accomplished that is signed by the employee (related to prong two).
Prong four is critical and requires careful attention—the repayment obligations must arise from legitimate or approved circumstances. For example, Colorado does not permit deductions because the employee cost the employer an important sale or client or failed to perform their work satisfactorily. The deduction must generally arise from something provided to the employee, for the employee’s benefit, and not a cost of doing business. By way of another example, if the repayment obligations result from damage to the employer’s property that was not provided to the employee (like dishes at a restaurant), then an employee’s wages, including PTO, cannot be deducted. This does not necessarily prohibit recovery through other lawful means but does prohibit deducting from wages.
In sum, yes (in Colorado, at least), you can apply the value of an employee’s accrued but unused PTO to their repayment obligations if the four conditions above are satisfied. Administratively, this could be applying the agreed-to amount of PTO per paycheck while adding an equivalent deduction in payroll. The easiest method might simply be to deduct the value from the employees’ PTO bank—with the same reflected on the employee’s paystub to maintain proper record-keeping—and a note that the deduction was for repayment.
