by Jodi R. Bohr Gallagher & Kennedy, P.A.

The Fair Labor Standards Act (FLSA) subjects employers to many requirements for paying wages to nonexempt employees (typically hourly workers). Subject to minimum wage and overtime requirements, an employer may deduct amounts from an employee's wages for things such as uniforms, property damage, tools, and cash shortages.

Other deductions, such as taxes, union dues, insurance premium payments, repayment of loans from third parties, and free and clear advances from the employer, are permissible even if they bring an employee's wages below the statutory minimum wage. Because not all possible wage deductions are spelled out in the FLSA, however, you should take care when withholding other deductions from final (or any) paychecks.

Final paycheck deductions

Carrie Ward was a Costco Wholesale Corp. employee from 2003 to 2006 and the principal plaintiff in the collective action Ward v. Costco. During her employment, she applied for a company-guaranteed credit card. The credit card program allowed employees to make purchases at Costco using a credit card issued by a third party. While it guaranteed the card if an employee defaulted, Costco also required the employee to execute an agreement permitting it to deduct an amount equal to her outstanding credit card balance from her final paycheck.

Ward was discharged in May 2006. At the time of her discharge, she earned $13.37 per hour. Costco deducted her $1,139 credit card balance from her final paycheck. The deduction came from her accrued vacation and sick pay, not from pay for hours she had worked.

Former employees revolt (sue, actually)

Banding together, Ward and 18 other similarly situated former employees sued Costco, alleging its deductions for their outstanding credit card balances from their final paychecks violated the FLSA's minimum wage and overtime pay requirements as well as the California Labor Code. For every plaintiff, the credit card deductions amounted to less than the amount of leave pay for which they were compensated.

Therefore, the credit card deductions came from nonwork pay, not from wages earned for hours worked.
In response to their allegations, Costco asserted that the deductions were permissible because the employees who were issued a company- guaranteed credit card had provided Costco with written authorization to deduct any outstanding balance from their final paychecks. The district court ruled in Costco's favor, and the former employees appealed.

Actions didn't violate FLSA

Affirming the district court's decision, the U.S. Court of Appeals for the 9th Circuit--which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington--ruled that (1) the FLSA doesn't require employers to pay employees for all unused vacation and sick time upon termination, (2) the deduction for the outstanding credit card balance didn't exceed the amount of the employee's balance of leave pay, and (3) the hourly wages in the final paycheck exceeded the overtime and minimum wage requirements.

The 9th Circuit also rejected Ward's claims under the California Labor Code. The court reasoned that the employees had agreed to the deduction of the outstanding credit card balance upon separation from employment and that Costco had in fact paid all wages due upon termination.

Takeaway

Take note that the 9th Circuit's decision should be applied narrowly to the facts of this case. Costco had obtained prior written authorization for the deductions from each employee when it guaranteed the credit cards.

Also, the district court found that Costco hadn't withheld enough from the final paychecks to actually cut into the employees' minimum or overtime wages because the deductions came from accrued leave, not hours worked. The outcome might have been different if one or more of the employees didn't have sufficient accrued leave and the deductions in their final paycheck were made from hours worked.

Unfortunately for Costco, no good deed goes unpunished. The company extended credit to employees who otherwise would have been unable to obtain credit on their own. While it prevailed in the collective action, it had to expend considerable time and resources over a few years to do so.

Jodi R. Bohr, an attorney with Gallagher & Kennedy, P.A., practices employment and labor law, with an emphasis on litigation, class actions, and HR matters, and is a frequent speaker on a wide range of employment law topics. She may be reached at jodi.bohr@gknet.com or 602-530-8035.