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State Department of Labor's Proposed Wage Deduction Regulations

In a previous article, we discussed the wage deduction legislation that Governor Andrew Cuomo signed into law in September 2012, which amended New York Labor Law §193 and expanded the types of deductions that an employer permissibly may make from employees' wages.1 Although the legislation took effect in November 2012, the new law also provides that wage deductions must comply with regulations promulgated by the New York Department of Labor. N.Y. LAB. LAW §193(1)(c)-(d). To that end, approximately six months after the effective date of the new law, the Labor Department published its proposed wage deduction regulations in the May 22, 2013, issue of the New York State Register, and received public comments through July 6, 2013.

Although these regulations provide some guidance to employers, importantly, they are not yet in final form, and employers should be aware that they are still subject to potential revisions. In this article, we review the newly proposed regulations, including new rules regarding wage deductions for overpayments and salary advances and deductions "for the benefit of the employee." We also make some practical suggestions that employers may wish to consider in anticipation of complying with these proposed regulations.

Benefit of the Employee

The amended Labor Law §193 states that employers may make certain enumerated deductions from employee wages.2 N.Y. LAB. LAW §193(1)(b). In addition to the permissible wage deductions specifically listed in the statute, §193(1)(b) contains a "catch-all" which also permits deductions for other "similar payments for the benefit of the employee." The proposed regulations seek to clarify that wage deductions are considered to be "for the benefit of the employee" when they provide financial or other support for the employee, the employee's family, or a charitable organization, and are limited to the following seven categories: (i) health and welfare benefits; (ii) pensions and retirement benefits; (iii) child care and educational benefits; (iv) charitable benefits; (v) representation dues and assessments; (vi) transportation; and (vii) food and lodging. The Labor Department's proposed regulations also provide some illustrative examples of the types of deductions permitted within each of the aforementioned categories.

The proposed regulations warn that mere "convenience" is not a recognized benefit for determining whether any given wage deduction is "for the benefit of the employee." For example, according to the Labor Department, if an employer offers to cash an employee's paycheck, the employer may not deduct a fee for providing that service because mere convenience of a paycheck cashed by an employer does not provide the requisite "benefit to the employee." Moreover, the proposed regulations explain that although employers are not precluded from making deductions in all cases where there is a benefit to the employer, any "deductions that result in financial gain to the employer at the expense of the employee" may call into question whether a given deduction truly provides the requisite "benefit to the employee."

The proposed regulations also include a non-exhaustive list of deductions that the Labor Department deems "not similar" to the permissible deductions that may be taken "for the benefit of the employee," including: (i) employee purchase of tools, equipment and work attire; (ii) recoupment of unauthorized expenses; (iii) repayment of employer losses; (iv) penalties for misconduct or resigning without notice; and (v) contributions to political campaigns.

The proposed regulations would eliminate the current regulation requiring that any non-enumerated deductions for "similar payments for the benefit of the employee" not exceed 10 percent of the gross wages due to the employee in a payroll period.

Overpayments

The amended Labor Law §193 permits an employer to deduct from an employee's wages for an overpayment due to mathematical or other clerical error. N.Y. LAB. LAW §193(1)(c). The proposed regulations do not expressly require written authorization or consent from employees for employers to make wage deductions for such overpayments. However, the proposed regulations do govern the specific timing—depending on the size of the overpayment to be reclaimed—and the required content of a Notice of Intent that employers must provide to employees regarding their intent to commence deductions to recover such overpayments. But, the proposed regulations do not specify the manner—whether paper or electronic—by which employers are permitted to provide the required Notice of Intent.

The proposed regulations require employers to adopt a procedure whereby employees may dispute the alleged overpayment and/or terms of recovery, or seek to delay recovery. The proposed regulations specifically detail the way in which employees may contest an alleged overpayment, and how and when employers must respond to employees' challenges. Employees must be informed in the Notice of Intent to commence deductions of the employer's available dispute resolution procedure, including the process by which employees may contest the overpayment and/or terms of recovery, or a reference to where such description of the process is located.

Employers also must specifically provide, in the Notice of Intent, the date by which the employee shall contest the overpayment. Furthermore, the proposed regulations expressly indicate that any dispute resolution procedures in existing or new collective bargaining agreements that provide at least as much protection as described in the proposed regulations will be deemed to comply with the regulations.

If an employee invokes the employer's dispute resolution process to challenge an overpayment, the employer may not commence any wage deductions until at least three weeks after issuing a final determination following the steps of the employer's dispute resolution procedure. An employer's failure to afford employees a compliant dispute resolution procedure creates a presumption that a contested deduction was impermissible.

If an employer may properly proceed to recover an overpayment following a final determination in the dispute resolution process, two different rules govern the amount of the permissible recovery. If the overpayment is less than or equal to the employee's net wages after other permissible deductions in the next wage payment, the employer may recover the entire overpayment from the next wage payment. But if the recovery would exceed the employee's net wages in the subsequent wage payment, the employer may not recover more than 12.5 percent of the gross wages from the next wage payment, nor shall the deduction reduce the employee's effective hourly wage below the state minimum wage.

Deductions for Advances

The amended Labor Law §193 permits an employer to deduct from wages for repayment of salary advances. N.Y. LAB. LAW §193(1)(d). The proposed regulations define "advance" as the "provision of money by the employer to the employee based on the anticipation of the earnings of future wages." While the proposed regulations state that certain monies provided, if accompanied by interest or fees are not advances, the regulations do not expressly provide whether the definition of "advances" includes other elements of compensation, such as advanced vacation pay. The proposed regulations prohibit employers from giving or deducting any additional advances until the existing advance has been repaid in full.

Pursuant to the proposed regulations, prior to giving any advance to an employee, the employee shall give written authorization for the repayment deduction(s) to be made. This authorization must specify the amount of the advance, the amount to be deducted to repay the advance, in total and per wage payment, and the dates each deduction will be taken. The authorization would also have to include notice that the employee may contest any deduction which is not in accordance with the advance authorization. According to the proposed regulations, the authorization can be revoked only prior to the employer providing the advance. The proposed regulations also permit employers to include, as part of the advance authorization, a "total reclamation" provision, effectively enabling employers to deduct the remaining balance of the advance from the employee's last wage payment should employment end prior to the expiration of the other terms of the written advance authorization.

As with deductions for overpayments, the proposed regulations require employers to implement a dispute resolution procedure that enables employees to dispute the amount and frequency of deductions not made in accordance with the terms of the written authorization notice. The proposed regulations also detail the employer's response obligations to an employee's objection.

Should an employee use the employer's dispute resolution procedure, the employer shall cease deductions until it replies to the employee's objection, and any appropriate adjustments are made. Any delay in repayment due to the dispute resolution procedure will extend the authorized time frame within which the employer may deduct to recover the advance. Just as with deductions for overpayments, an employer's failure to implement the requisite dispute resolution process will create a presumption that the contested deduction was prohibited.

Remedies

If an employer takes deductions from an employee's wages in violation of §193, the Labor Law provides a number of remedies. First, if an employee prevails on a wage claim under Article Six of the Labor Law, the employer will be liable for costs and reasonable attorney fees, and unless the employer proves that it had a good faith basis for believing that its underpayment of wages was in compliance with the law, then the employee shall also be entitled to recover from the employer liquidated damages in the amount of 100 percent of the total amount of wages found to be due. N.Y. LABOR LAW §198(1-a). Moreover, an employer, as well as the officers and agents of any corporation, partnership or limited liability company, who knowingly commits a wage payment violation by failing to pay the wages of any of its employees in accordance with the provisions of the Labor Law, may be subject to criminal penalties and fines. N.Y. LABOR LAW §198-a(1). The term "knowingly" has been interpreted as requiring actual "knowledge of the existence of the facts constituting the crime." See People v. Lustig, 94 Misc.2d 669, 673 (N.Y. City Crim. Ct. 1978), rev'd on other grounds, 101 Misc.2d 54 (N.Y. Sup. Ct. 1979). Finally, the Labor Department also has the authority to seek civil penalties in the amount of $500 per violation of the Labor Law. N.Y. LABOR LAW §197.

Practical Considerations

The proposed regulations currently are subject to revision based on comments received during the public comments period. The proposed regulations in their present form, however, expressly limit an employer's ability to provide a "convenient" method for employees to pay for incidental expenses incurred at the workplace unless they are deemed "for the benefit of the employee" and fall within one of the permissible categories. While it appears that "welfare benefits" is the category within which such incidental expenses could most likely fall, employers will undoubtedly seek further clarification from the Labor Department and courts as to the scope of these "welfare benefits," particularly since the examples in the proposed regulations are expressly "not exclusive."

Although the proposed regulations are not yet in their final form, employers should still be prepared for certain provisions to impose additional pay practice obligations, which may cause employers to incur related costs. First, employers should begin developing their dispute resolution procedures for overpayment and advance deductions, and training their managers and human resources staff to implement, execute and monitor the processes appropriately. Indeed, the failure to comply with this aspect of the proposed regulations could seriously inhibit an employer's ability to defend against a claim of unlawful deductions.

Employers also should begin drafting template Notice of Intent forms for deductions of overpayments, and authorization forms for salary advance deductions, and deductions made "for the benefit of the employee" to conform to the requirements of the proposed regulations, recognizing of course that the requirements are still subject to revision.

Employers should also review their employee handbooks and payroll systems to ensure that policy statements and payroll systems (some of which may be automatic) are updated to comply with the timing and frequency regulations in connection with wage deductions. For example, employers would have to make clear in their policies that once an employee has received an advance, the employer will not give any further advances until any existing advance has been fully repaid.

Payroll systems could also be configured to recognize when any outstanding advance balance remains in an employee's name. Employers may also wish to evaluate whether their payroll systems are capable of handling any newly permitted wage deductions in compliance with the proposed regulations.

Jeffrey S. Klein and Nicholas J. Pappas are partners at Weil, Gotshal & Manges. Celine J. Chan, an associate at the firm, assisted with the preparation of this article.

Endnotes:

1. See Jeffrey S. Klein and Nicholas J. Pappas, Pending Amendments to New York Wage Deductions Law, NYLJ, Aug. 6, 2012, available at http://www.newyorklawjournal.com/?germane=1202613668448&id=1202565947237.

2. See id.

Reprinted with permission from the August 5, 2013 edition of the New York Law Journal © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

This article also appeared in the July 2013 Employer Update.

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