Update: New York Department of Labor Releases Proposed Wage Deduction Regulations

by Sheppard Mullin Richter & Hampton LLP

As we detailed in a previous blog post (available here), in September 2012, Governor Cuomo signed into law new legislation which permits employers to make additional deductions from employees’ paychecks. Among other things, the bill amended Section 193 of the New York Labor Law to authorize employers to make deductions from an employee’s wages to recover accidental wage overpayments, or to make deductions in connection with repayment of a salary/wage advance. Although the statute became effective on November 6, 2012, under the law, such deductions could only be made subject to regulations to be promulgated by the New York Department of Labor. This guidance came on May 22, 2013, when the Department of Labor published its proposed regulations for wage deductions under Section 193. In addition to addressing the procedures for deductions for overpayments and advances, the proposed regulations also provide clarification on deductions that may be taken “for the benefit of the employee.” The proposed regulations (available here) are currently open for public comment until July 6, 2013, meaning the Department of Labor will likely finalize and then codify its regulations later this summer.

Deductions for Overpayments

Under the proposed regulations, employers are permitted to make deductions from an employee’s wages to recover overpayments resulting from the employer’s mathematical or clerical error. In order to do this, the employer must first provide the employee with notice of its intent to make the deduction, and must do so within eight weeks of the employer’s overpayment.

Where the overpayment is less than or equal to the net wages earned after other permissible deductions in the next wage period, the employer may recover the entire amount of such overpayment in that next wage payment. Before doing so, however, the employer must give at least three days’ notice to the employee. For other deductions that will be made on a periodic basis, the employer must give an employee a full three weeks’ notice before the deductions can commence.

In circumstances where the recovery of an overpayment would exceed the net wages in the subsequent wage payment, an employer’s deductions may not exceed 12.5% of the gross wages earned in that pay period, nor may they reduce the effective hourly wage below the minimum wage.

The proposed regulations also require employers to implement a procedure under which employees may dispute the overpayment and terms of recovery. In the case of overpayments that are less than or equal to a single payment of net wages, an employee has two days to respond to the employer’s notice. For overpayments exceeding this amount, the employee’s time to respond is increased to one week. If an employee challenges the overpayment and utilizes the dispute resolution procedure, the employer may not make any deductions until at least three weeks after the dispute reaches a final determination. An employer’s failure to afford this process to its employee will create the presumption that the contested deduction was impermissible.

Deductions for Wage Advances

The proposed regulations also authorize employers to make deductions for wage advances given to employees. Before the advance is given, the employer and employee must agree in writing to the amount to be advanced, the amount to be deducted to repay the advance (both in total and per wage payment), and the date(s) when each deduction shall be made. Once the employer has provided the employee with the advance, the employee may not revoke the written authorization. The authorization must also include notice to the employee that he or she may contest any deduction that is not made in accordance with the terms of the written authorization.

The proposed regulations allow employers to recover advances by making wage deductions no less frequently than each wage payment. Note, however, that under the proposed regulations, any provision of money that is accompanied by interest or fees is not considered an advance, and therefore cannot be reclaimed through wage deductions. Additionally, once an employee is given an advance, no further advance may be given or deducted until the existing advance has been repaid in full.

Just as with deductions for overpayments, the proposed regulations also require employers to implement a procedure under which employees may dispute the amount and frequency of deductions that are not permitted under the written advance authorization. An employee must be able to provide written notice of his or her objection to the deduction, and the employer must reply in writing to the objection as soon as practical. If an employee challenges the deductions under this procedure, the employer may not make any further deductions until it has replied to the employee. An employer’s failure to afford this process to its employee will create the presumption that the contested deduction was impermissible.

Deductions “for the Benefit of the Employee”

The proposed regulations also provide additional clarification regarding the types of deductions which may be taken by the employer “for the benefit of the employee.” Under Section 193, employers are allowed to make certain enumerated deductions that are expressly authorized in writing by the employee and are “for the benefit of the employee,” including deductions for insurance premiums and prepaid legal plans, pension or health and welfare benefits, contributions to a bona fide charitable organization, dues or assessments to a labor organization, discounted parking or transit payments, fitness center or gym membership dues and cafeteria and vending machine purchases made at the employer’s place of business, among others. Additionally, employers are also allowed to deduct payments that are “similar to” those specifically enumerated in Section 193. The proposed regulations provide that payments made for the benefit of the employee will be allowed as “similar to” if they fall within one of the following categories: health and welfare benefits, pensions and retirement benefits, child care and educational benefits, charitable benefits, representational benefits, transportation benefits, and food and lodging benefits. Payments for benefits not falling within one of these categories will not be considered “similar to” the allowed deductions enumerated in Section 193 and, therefore, are not permitted.

In addition to providing guidance on the definition of “similar to,” the proposed regulations also specifically state that certain types of deductions are not permissible under Section 193. In particular, the following categories of deductions are not permissible: repayment of loans, advances and overpayments that are not in accordance with the regulations; employee purchases of tools, equipment and attire required for work; recoupment of unauthorized expenses; repayment of employer losses, including for spoilage and breakage, cash shortages, and fines or penalties incurred by the employer through the conduct of the employee; contributions to political action committees, campaigns and similar payments; and fees, interest or the employer’s administrative costs.

If the proposed regulations are adopted unchanged, both employers and employees will benefit from the increased scope of allowable deductions. As explained above, however, the regulations are still open for public comment and will likely not be finalized until later in the summer. As a result, employers should refrain from taking deductions from employees’ wages relating to wage overpayments or repayment of advances until the regulations are finalized. In the meantime, we will continue to monitor the status of the regulations and will keep you apprised of any developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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