May an employer legally require reimbursement for breakage or customer theft?

By Michael J. Burns, courtesy of SBAM Approved Partner ASE

Years ago this author was a young worker pumping gas at a local gas station (these were truly ancient times: no customer ever pumped his or her own gas). When the crew came up “short” at the end of the shift—meaning they turned in less money than the pumps said they had sold—the station manager would take the shortage out of everyone’s pay.  This always seemed grossly unfair, of course. But it was either that or get fired.

In business, the loss of inventory due to theft is called “shrinkage.” The loss of inventory or other materials due to damage or breaking is called “breakage.” Typically this is considered the risk of doing business and the employer assumes the loss.

However, as is the case of some industries, if a business owner decides to make employees financially responsible for these types of losses, is this legal?

That depends.

Under federal law, an employer can take anything out an employee’s pay provided it establishes a proper policy and the pay reduction does not breach the minimum wage law. The federal minimum wage law states that deductions from pay can be made for losses caused by the employee as long as employee’s rate of pay does not fall below the federal minimum wage for the work week for which the pay deduction was made.

But don’t act too fast; state laws may trump federal law.

Withholding allowances of pay for such reasons varies by state. California has a strict prohibition against employers docking pay because of shortage or breakage unless the loss was intentional or due to gross negligence. In practical terms this is a high standard for an employer to meet. At the other end of the legal spectrum are states such as Arkansas, which has no laws addressing this issue. In these states the employer is free to establish any policy it sees fit within the parameters of federal law.

And then there is Michigan which, like several other states, sits in the middle of the range of states tha protect employees to an extent. Deductions from pay can be made pursuant to a policy as long as the employer gets prior written authorization to make the deduction. The authorization must state when the deduction can be made and what the reason for the deduction was. Employers that seek a blanket authorization for deductions from pay may run into legal problems if challenged.

For more information about states-by-state requirements surrounding employer’s policy recovering losses due to employee theft, negligence or breakage, ASE members can consult the ASE Virtual Library State Law search feature. This search tool allows users to put in each state they desire information from, and use a keyword such as “deductions from pay” or “employee theft” to search all fifty states and U.S. territories’ laws on those subjects. This search feature also tells the user if the state does not have a law addressing the subject, which saves additional research time.