I am often asked by employers if they can deduct from an employee’s paycheck money owed the employer for payroll advances, personal loans or for lost or damaged company property issued to the employee. Another common question is whether an employer may deduct from an employee’s final paycheck amounts previously advanced for vacation or sick leave that was not yet earned. Until recently, the answer to these questions was determined exclusively under federal wage and hour laws. In most instances, the very simple answer was as long as the amount of the wage payment after offset netted the employee an hourly wage in excess of the minimum hourly wage, the deduction was permissible.

This changed in Tennessee in 2011 when the Tennessee legislature enacted TENN. CODE ANN. 50-2-110. That statute places significant limits on an employer’s ability to take deductions from payroll beyond federally required tax deductions and employee insurance/retirement contributions.

This statute provides that an employer may only offset an employee’s wages for an amount the employee is alleged to owe the employer when three (3) conditions are met. First, the employer and employee must enter into an agreement that the employer will advance wages, lend money or permit the employee to charge personal expenses on a business credit card issued to the employer. Second, the employee must sign a written agreement authorizing the employer to offset amounts owed for those purposes and the employer must have a copy of the signed agreement in its possession at the time the payroll offset occurs. Third, fourteen (14) days before the payroll offset occurs, the employer must provide written notice to the employee advising of the amount owed, that a payroll offset will occur if the debt is not paid prior to the designated payroll date, and that the employee may submit a sworn affidavit to both the employer and Tennessee Department of Labor contesting the amount owed. If the employee submits the sworn affidavit, there can be no offset and the employer’s only recourse for repayment against the employee is to commence judicial proceedings.

It is important to note the very limited range of debts for which Tennessee law authorizes a payroll offset. They may only be used for advances of wages, employee loans and reimbursement of previously approved personal charges on a business credit card. The statute lists no other reasons and it cannot fairly be interpreted to allow offsets for other forms of debt or claims. In fact, the statute specifically requires that the “written agreement” must be in existence before any advancement of wages, employee loan or approval for personal credit card expenses occurs. It therefore is clear that an employer cannot make payroll deductions for unforeseen charges such as for lost or damaged equipment, or to recoup other money owed from a final paycheck following a termination or resignation.