Can I withhold a paycheck if employee fails to return company property?

An employer may be entitled to withhold a final paycheck if the employee has not returned company property, but this must be explicitly stated in employment contracts or company policies and conform to applicable laws.

It’s not uncommon for employers to entrust company property to employees, such as:

• Office keys
• Building entrance badges
• Uniforms
• Computers/laptops
• Cellphones
• Vehicles
• Job-specific tools or equipment

If the employee terminates and does not return the property, you may be tempted to hold back their final pay.

However, withholding an employee's final paycheck is generally against the law in many jurisdictions. Most countries and states have labor laws that protect employees' rights, and timely payment of wages is one of those rights. 

The Fair Labor Standards Act (FLSA) requires employers to promptly pay all wages owed to employees by the next scheduled payday, even if they are terminated. Withholding an employee's final paycheck to recover company property is not allowed under the FLSA. States also have their own specific laws for final paychecks, ensuring timely payment for terminated employees and protecting their rights. Adherence to these laws is vital for employers to avoid legal issues and protect their workforce's rights.

If the employee is nonexempt, you may be able to dock their wages

Under the FLSA, employers can deduct the cost of unreturned company property from the wages of nonexempt employees, as long as this deduction does not cause the employee's pay to fall below the minimum wage or reduce any owed overtime wages.

However, it's essential to review state law as many states impose limitations on the types of deductions that can be made from final wages. Some states may require written consent from the employee before deducting for unreturned property, while others may demand advance notice to the employee before implementing the deduction. For instance, in North Carolina, employers must provide at least seven days' notice.

Furthermore, it is important for employers to note that specific states may completely forbid such deductions. For instance, in Delaware, employers are prohibited from making deductions for employees' failure to return company property. Consequently, it is crucial for employers to be well-informed about both federal and state laws, ensuring full compliance to prevent legal complications when deducting wages for unreturned company property.

If the employee is exempt, you cannot make the deduction

In opinion letter FLSA 2006-7, the U.S. Department of Labor says that employers cannot dock an exempt employee’s salary to recover the cost of unreturned company property even if the employee authorizes the deduction.

The DOL’s reasoning

According to the FLSA's salary basis rule, exempt employees are entitled to receive their full, guaranteed salary on each payday, except in cases of permissible deductions. However, deducting from an exempt employee's salary for the loss, damage, or destruction of company property is not allowed, as it would violate the salary basis rule.

Employers can choose to pursue legal action

Not being able to recoup the cost of unreturned property via payroll deduction does not mean all is lost, as employers have the option of filing a lawsuit against an employee. The decision to pursue legal action hinges on various factors, such as the property's value and the seriousness of the circumstances.

A best practice is to develop strong policies and procedures regarding the receipt, use, care and return of company property. Incorporate the information into your employee handbook, which should be distributed to all employees.