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Deductions for Overpayments and Wage Advances Prohibited Under New York Law

One of the most common questions we receive from our clients is "can we deduct an overpayment or wage advance from our employee's paycheck?" To understand the answer, it is necessary to understand New York's wage deduction law.

New York Labor Law § 193(1) prohibits deductions from wages except deductions which (a) are made in accordance with the provisions of any law, rule or regulation, or (b) are expressly authorized in writing by the employee and are for the benefit of the employee. Examples of deductions made "for the benefit of the employee" include payments for insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization, and similar payments for the benefit of the employee (emphasis added).

The next issue that must be considered is, "what are similar payments for the benefit of the employee?" In Angello v. Labor Ready, 7 NY3d 579 (2006), the New York State Court of Appeals answered this question and held that "similar payments" under NYLL § 193(1) are those that are either "monetary" (meaning that they are investments of money for the later benefit of the employee) or "supportive" (meaning that the deducted wages are used by someone other than the employee or employer to support some purpose of the employee). Furthermore, deductions for "similar payments for the benefit of the employee" are limited to 10% of the gross wages due to the employee in the payroll period, in accordance with 12 NYCRR § 195.1.

These deductions are the only deductions permitted under New York Labor Law. Any other deductions that go directly to the employer or its subsidiary are prohibited, including (according to recent New York State Department of Labor opinion letters dated August 3, 2009 and January 21, 2010) those made to recoup overpayments or advances in wages, even where such deductions are authorized by the employee.

So how are New York employers to go about recouping overpayments and/or wage advances? One way is to seek relief in a separate proceeding against the employee (i.e., an action in civil court). The other way is to request the employee make a voluntary payment to compensate the employer for the overpayment or advance. However, employers beware - such requests must be accompanied by assurances that no adverse consequences will occur if the payment is not made. Otherwise, the NYSDOL will interpret the request as a forced "chargeback" in violation of NYLL § 193(2). Putting the request for voluntary payment (along with the required assurances) in writing is strongly recommended.

One final note of interest - the NYSDOL has noted that "nothing in the New York State Labor Law prohibits an employer from taking disciplinary action against an employee for failing to inform the employer that he or she has been overpaid." Of course, collective bargaining agreements, employer policies and other factors could impact an employer's ability to take such action. Therefore, New York employers who wish to discipline an employee for failing to notify the company of an overpayment should consult counsel prior to taking disciplinary action.