What are Employer Rights that Involve a Payroll Advance for a Terminated Employee?
Moving out entitles the employee to a final paycheck.
- 1 Payroll Advance Agreement From an Employer
- 2 Payroll Advance Policy
- 3 Employee Termination and Client Rights
- 4 Rules for Final Pay to Employees
Employers sometimes assist struggling employees with personal loans or payroll advances. If the employer terminates the employee, the employer may lose the payroll advance. Even if you have a signed contract with the employee that addresses the possibility of termination, some of the provisions may be unenforceable in your state. Federal employees may be subject to contract repayment provisions but this does not apply to your private small-business employees. Most states have laws that protect employees from unauthorized payroll deductions.
The federal government provides for deduction of taxes; state laws control what other items the employer can deduct from a paycheck. Many states allow deductions the employee approves with a signature that are beneficial to the employee. New York Labor Law Section 193 specifies what an employer can deduct from an employee’s paycheck. This includes insurance premiums, pension or health and welfare benefits, charitable contributions, payments for U. S. bonds and labor union dues. The New York law excludes repayment of debt as a valid deductible from a paycheck.
In California, if you fail to pay wages to which the employee is entitled, you may find that the wages continue to accrue for up to 30 days under California Labor Code Section 203. You may find it is not worth taking a chance by deducting a payday advance in California. Texas Payday Law allows you to deduct a loan made to an employee only if the employee agrees in writing to the deduction from the paycheck. If the employer acts in bad faith, the Workforce Commission can impose a penalty of $1,000 or the amount of the wages claimed by the employee. Check for a specific law in your state that covers deductions and final paychecks.
You may perceive this as a “payroll advance,” whereas the employee sees it as a friendship loan. Consider the result if your relationship is not employer-employee as to the loan. As an individual, you are entitled to recover funds you advanced to someone if you have a written agreement or contract to prove the agreement. The state labor department may see pursuing recovery of your funds through the employee’s paycheck as heavy-handed or as an abuse of your position as employer. Study the result in your state before you withhold the funds from a final paycheck. Do not trust your employee handbook even if it states that the final paycheck will have deductions for payroll advances. This is a common paragraph in a generic handbook used in many workplaces, but that does not make it legal in your state.
Wage Garnishment Law
Even those who have a legal judgment for wage garnishment under the Consumer Credit Protection Act cannot garnish more than the federal law allows. The limit is 25 percent of disposable earnings in any workweek or an amount above 30 times the federal minimum wage. With the federal minimum wage at $7.25 in 2011, this law protects $217.50 of disposable income from garnishment each week. Absent a specific law in your state that addresses deduction of a payroll advance, a valid argument may be made that the employee cannot be entitled to less.
If your state does not allow you to withhold a payday loan or payroll advance from an employee’s paycheck, attempt to negotiate with the employee prior to termination. You may also choose to be less generous in severance with your employee to make up for the payday advance. You must be careful not to discriminate in any action you take. If you cannot recoup your loss and if your employee signed an agreement or contract with you, you may file a lawsuit for the return of your funds.
About the Author
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor’s degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.