The Last Paycheck: Avoiding the Pitfalls
By Wm. Joseph Austin, Jr.
The great Western novelist Louis L’Amour penned this line, “There will come a time when you believe everything is finished. That will be the beginning,” which in any other context would resonate with hope and anticipation. All too often, however, the last paycheck issued to a terminated employee is the beginning of conflict and controversy. Under the North Carolina Wage and Hour Act (NCWHA), the stakes can be very high if the employer withholds or makes a deduction from it with a blind eye toward the sometimes tortuous provisions of N.C. Gen. Stat. §§ 95-25.?A or -25.8. We recap the salient points and authorities in this paper.
1. Wages in Dispute
When the amount of wages is in dispute, the employer must pay any undisputed part of the compensation on the regular payday. Acceptance of part payment does not restrict the employee’s right to claim the balance of the wages he is making a claim for, N.C. Gen. Stat.§ 95-25.7A(a), nor does it constitute a release of the employee’s claim. N.C. Gen. Stat.§ 95-25.7A(b). There is no such thing as accord and satisfaction under the NCWHA in such cases.
2. Withholding of Wages or Deductions from Pay
An employer may withhold or divert any portion of an employee’s wages when:
(1) the employer is required or empowered to do so by state or federal law, or (2) the employer has a written authorization from the employee. N.C. Gen. Stat. § 95-25.8(a). Employers are required to furnish each employee an itemized statement indicating the amount and purpose of all deductions, diversions, payments, or withholdings of wages for each pay period in which deductions or recoupments are made. 13 N.C. Admin.
Code 12.0304(a). An authorization must be signed on or before the payday for the pay period from which the deduction is to be made and must indicate the reason for the deduction. N.C. Gen. Stat. §95-25.8(a)(3).
There are two permissible types of authorizations: specific and blanket. A specific authorization may be for one or more paychecks. It must state the dollar amount or percentage of wages which the employee agrees may be deducted from each paycheck. 13 N.C. Admin. Code 12.0305(c). If the deduction is for the convenience of the employee, the employee must be given a reasonable opportunity to withdraw the authorization. N.C. Gen. Stat. § 95-25.8(a)(3). Deductions for the convenience of the employee include but are not limited to deductions for savings plans, credit union installments, savings bonds, union or club dues, uniform rental, uniform cleaning, parking, and charitable contributions. 13 N.C. Admin. Code 12.0305(b).
A blanket authorization authorizes categories of deductions or withholdings without specifying an actual dollar amount. 13 N.C. Admin. Code 12.0305(d). The employer may not make the deduction until the employee has been given advance written notice of the specific amount of the proposed deduction and has been given a reasonable opportunity to withdraw the authorization in writing before the deduction is made. A reasonable opportunity to withdraw is comprised of at least three days from the date of. the employer’s notice of the actual amount to be deducted or the employee’s written notice of withdrawal of the authorization.
b. Diversions of Wages for the Employer’s Benefit
A payroll deduction that satisfies a requirement of the employer is not a deduction for the convenience of the employee and the employer is not required to give employees a reasonable opportunity to withdraw their specific authorizations prior to making such a deduction. Deductions for the employer’s benefit are limited in amount as follows: (a) in nonovertime workweeks, wages may be reduced to the minimum wage level but cannot go below the minimum wage, and (b) during overtime workweeks, wages may be reduced to the minimum wage level for the first 40 hours, but nothing can be deducted from the full time and one half overtime premium. N.C. Gen. Stat. § 95-25.8(b).
c. Cash Shortages, etc.
Often the departure of the employee comes on the heels of a cash shortage, inventory shortage, or loss or damage to the employer’s property attributable to the departing employee. Deductions in such a case must also comply with the foregoing provisions, and, except when a separation occurs, a seven-day notice is required. N.C. Gen. Stat.§ 95-25.8(c)..
d. Advances and Overpayments
In the case of overpayment of wages to an employee due to miscalculation, bona fide error, or prior advance of wages at the employee’s request, such amount may be set off against the employee’s wages without compliance with the foregoing procedures or limitations. N.C. Gen. Stat. § 95-25.S(d). However, deductions for interest on such amount will require written authorization. Id. Best practice in the case of an advance is to obtain a signed agreement from the employee stipulating receipt of the advance, the amount of the advance, and the authorization for withholding the unpaid balance from the final paycheck. Refer to the amount explicitly in the signed agreement as an “advance.”
e. Prosecution of Employee
Exception is also made in cases of suspected employee theft, although the law requires the employer to take action in order to perfect it. If criminal process has been issued against an employee for a charge incident to a cash shortage, inventory shortage, or damage to the employer’s property, the employer may withhold or divert a portion of the employee’s wages in order to recoup the amount of the cash shortage, etc., without written authorization. N.C. Gen. Stat. § 95-25.S(e). Still, the amount of the withholding must comply with the restrictions on sacrosanct minimum wage levels and the overtime premiums. Id. If the employee is not successfully prosecuted, then the employee must reimburse the amount deducted. Id.
3. Recovery of Unpaid Wages
An employer who violates the minimum wage, overtime, or wage payment. provisions of the NCWHA is liable to the employee for unpaid minimum wages, overtime compensation, or other unpaid amounts, plus interest at the legal rate from the date each amount first came due. N.C. Gen. Stat. § 95-25.22(a). Additionally, an employee who has to sue the employer to recover the unpaid wages may be awarded liquidated (i.e., double) damages in the court’s discretion, but if the employer can show good faith to the satisfaction of the court and reasonable grounds for believing that the act or omission was not a violation, then the court may decide not to award liquidated damages. N.C. Gen. Stat.§ 95-25.22(al). The court may also award the employee costs and reasonable attorneys’ fees. The employee who files a suit may be responsible for such costs and fees if the court determines that the action was frivolous. N.C. Gen. Stat. § 9525.22(d). The double damages and attorneys’ fees are the heavy stick of deterrence on unauthorized and otherwise misguided deductions.
A small recovery of the actual unpaid wages (defined expansively under the NCWHA to include any and all pay or other amounts promised when the employer has a policy or practice of making such payments) can also generate an award of five figures in combined attorneys’ fees and liquidated damages. A case on point is Williams v. New Hope Foundation, Inc., 192 N.C. App. 528, 665 S.E.2d 586 (2008).
The plaintiff in that case made several claims for relief, for wrongful discharge and for violation of the Retaliatory Employment Discrimination Act (REDA), in addition to her claim under the NCWHA. The REDA and wrongful discharge claims were dismissed. She did recover $36 in unpaid wages, which were actually unpaid travel expenses, plus an equal amount in liquidated damages, a total award of $72. The trial court awarded her $25,000 in attorneys’ fees and $2,534.14 in costs on top of that. It was affirmed on appeal.
From an employer’s perspective a cautionary subtext is that the defense fees and costs incurred in that case, conservatively, had to be at least that much, if not two, three or even four times that amount. After all, the alleged wrongful and retaliatory discharge claims were dismissed, which probably took a lot of good legal work. The jury awarded the plaintiff a nominal $36, what would count as a defense verdict probably 99 times out of 100. No doubt the litigants, plaintiff included, thought that was the case until the attorneys’ fees and costs were awarded on top of it.
This should be a warning to any employer who wants to take a strong position in a wage and hour case. The NCWHA incorporates a punishing multiplier that creates a huge downside for what might otherwise seem to be a slight miscalculation or oversight.
The last paycheck usually signifies the end of the employment relationship. If recoupment from employee wages is done the wrong way, however, it may be the beginning of expensive litigation.