Can I Hold An Employee’s Paycheck?

August 22, 2022 | Business | Employment

Almost every employer has faced the following situation: an employee quits without notice, and still possesses property (uniforms, equipment, keys) that belong to the company.  Or worse, the employee is disgruntled and damages property of the company on her way out.  It’s alright, I’ll just hold her last paycheck hostage until she returns the property or pays me for the damage.  Right?  Wrong.  Well, in most cases, wrong.  There seems to be a common misconception that withholding a paycheck in a situation like this is a perfectly legal practice.  And, based on my experience and observations, it is a relatively common practice.

Faulty Workmanship Law

Wisconsin has a law that restricts an employer’s ability to withhold paychecks (or even make deductions before remitting a paycheck).  Often referred to as the “faulty workmanship law,” section 103.455 of the Wisconsin Statutes reads, in relevant part, as follows:

Deductions for faulty workmanship, loss, theft or damage. No employer may make any deduction from the wages due or earned by any employee, who is not an independent contractor, for defective or faulty workmanship, lost or stolen property or damage to property, unless the employee authorizes the employer in writing to make that deduction or unless the employer and a representative designated by the employee determine that the defective or faulty workmanship, loss, theft or damage is due to the employee’s negligence, carelessness, or willful and intentional conduct, or unless the employee is found guilty or held liable in a court of competent jurisdiction by reason of that negligence, carelessness, or willful and intentional conduct. If any deduction is made or credit taken by any employer that is not in accordance with this section, the employer shall be liable for twice the amount of the deduction or credit taken in a civil action brought by the employee. Any agreement entered into between an employer and employee that is contrary to this section shall be void.

Let’s break it down.

The following is a list of prohibited reasons to withhold employee pay:

1. Defective or faulty workmanship

This could include a subpar product that was made by an employee and has to be scrapped, costing the employer money. It could also include a refund or discount the employer had to give to a customer due to mishandling of the project by the employee.  Anything that you attribute to the employee’s conduct, whether it was intentional, negligent, reckless, careless, or just an honest mistake, cannot be a basis for keeping money out of an employee’s paycheck.

2. Lost or stolen property

This is pretty self-explanatory, and covers the kept uniform example given above, as well as straight up theft of any item that is the property of the company, including money. You fire an employee for dipping his hand in the till?  You may be entitled to a repayment of that money, but not by taking it out of his paycheck.  Consider a civil action, or a referral to law enforcement, who may prosecute the matter criminally, allowing you to restitution as a victim of the crime.

3. Damage to property

This covers any damage to property of the employer that you believe was caused by, or is the responsibility of, the employee. Similar to the situation of theft, you can consider civil or criminal procedures for recovering any sums you believe the employee owes you.

Written Authorization

But can’t I just have every employee sign something upon hire that allows me to hold their last paycheck in situations like this?  After all, the statute says “unless the employee authorizes the employer in writing to make that deduction.”  Nope. Here is the kicker: What the statute doesn’t explicitly explain, but what the Department of Workforce Development and the courts have interpreted it to mean, is that such written authorization is only valid if it is given after the loss has occurred and before the deduction is taken.  As a practical matter, most employers are unable to get departing or departed employees to sign something saying “you can take this out of my paycheck,” in large part because there is no incentive for the employee to do so, since you cannot withhold the employee’s paycheck unless or until the authorization is signed.

In the case of a current employee, however, an employer may have some leverage, because you have the power to discipline or terminate an employee who has engaged in theft or careless practices that have damaged property or cost the employee money.  In such a case, however, be careful not to run afoul of wage payment laws (which is beyond the scope of this article).

When in doubt, don’t deduct.

If you do, you could be liable for twice the amount of wages you withheld, pursuant to the statute.  There may be other creative solutions that can help protect your business while keeping you compliant with the law.

Employers who feel the prohibition set forth by this law presents a problem for their business practices should consult with a knowledgeable attorney regarding their options. Contact Kramer, Elkins & Watt, LLC at info@kewlaw.com or 608-709-7115 for more information about employment and wage laws.