Updated February 15, 2026
Can an Employer Deduct Business Expenses From Your Paycheck in California?
Can an employer withhold pay from your hard-earned wages? In California, this question affects thousands of workers who face unexpected deductions from their paychecks. The truth is that California maintains some of the strongest employee protections in the nation when it comes to wage withholding and deductions.
Unlike many states, California strictly limits when employers can legally withhold money from employee paychecks. The California Labor Code specifically prohibits most forms of wage withholding, although certain exceptions do exist. Understanding these boundaries is crucial for both workers seeking to protect their earnings and employers trying to maintain legal compliance.
This article examines the legal framework governing pay withholding in California, including the key Labor Code sections that protect employees. Additionally, we'll explore the legitimate circumstances when employers can make deductions, how commission structures are handled differently under the law, and common violations that could entitle workers to significant penalties. Furthermore, we'll provide practical guidance for both employers and employees to navigate these sometimes complex regulations.
Whether you've noticed unexpected deductions on your paycheck or you're an employer establishing payment policies, knowing these legal boundaries is essential to avoid costly disputes and potential litigation.
California Labor Code on Wage Withholding
The California Labor Code establishes strict rules about when employers may legally withhold portions of an employee's paycheck. These provisions create a framework that primarily protects workers while acknowledging limited circumstances where deductions are permissible.
Section 221: Prohibition on Recouping Paid Wages
California Labor Code Section 221 serves as a cornerstone of employee wage protection. This concise yet powerful provision simply states that it is "unlawful for any employer to collect or receive from an employee any part of wages previously paid." In essence, once an employer pays wages to a worker, those funds legally belong to the employee—the employer cannot take them back.
This straightforward prohibition prevents several problematic practices, such as:
- Forcing employees to return portions of their paychecks
- Making unauthorized deductions for damage to company property
- Recouping overpaid wages through self-help methods
- Penalizing employees through wage deductions
Courts apply an objective test to determine whether financial losses were due to dishonesty, willfulness, or grossly negligent acts. Nevertheless, even in cases of employee negligence, employers generally cannot resort to "self-help" by simply taking money back after payment.
Section 224: Exceptions for Authorized Deductions
Despite Section 221's broad prohibition, Section 224 carves out specific exceptions where an employer can legally withhold pay. According to this provision, employers may deduct wages under three primary circumstances:
- When required or empowered by state or federal law (such as income taxes or court-ordered garnishments)
- When expressly authorized in writing by the employee for insurance premiums, medical dues, or similar deductions
- When a collective bargaining agreement explicitly permits deductions for health, welfare, or pension contributions
Importantly, even authorized deductions must not amount to a "rebate or deduction from the standard wage" established through collective bargaining, wage agreements, or statute. Moreover, Section 224 specifically prohibits employers from withholding any portion of an employee's wages to pay taxes, fees, or charges prohibited by Section 50026 of the Government Code.
DLSE Guidelines on Legal Deductions
The Division of Labor Standards Enforcement (DLSE) provides further clarification on permissible wage deductions. According to DLSE guidelines, an employer can lawfully withhold amounts only under the three conditions outlined in Section 224.
The DLSE specifically addresses several categories of unlawful deductions:
- Gratuities or tips left for employees
- Cost of photographs required for employment
- Expenses for bonds required of applicants or employees
- Uniform costs when required by the employer
- Business expenses incurred by employees in discharging their duties
- Medical examination costs required as a condition of employment
Court decisions have further restricted employers' ability to take offsets against employee wages. For instance, in Barnhill v. Sanders, the court ruled that balloon payments on separation to repay employee debt are unlawful deductions even with written authorization. Similarly, in Hudgins v. Neiman Marcus, the court found that deductions for unidentified returns from commission sales were impermissible.
Consequently, while Section 224 provides limited exceptions to the general prohibition on wage withholding, these exceptions are narrowly interpreted by both the DLSE and California courts to preserve the protective purpose of the Labor Code.
When Can Employers Legally Withhold Pay?
Beyond the general prohibitions outlined in California Labor Code, there exist several specific scenarios where employers can legally withhold portions of an employee's paycheck. These exceptions balance worker protections with legitimate business operations and legal obligations.
Court-Ordered Garnishments and Tax Withholding
Court-ordered garnishments represent a significant exception to California's strict wage protection laws. When a debt collector obtains a judgment against an employee, they may secure a wage garnishment order that requires the employer to withhold a portion of the worker's earnings.
Notably, California law limits garnishment to 20% of the employee's disposable earnings. This cap applies to the total for all garnishments, so if multiple garnishments exist, the 20% maximum remains unchanged. An important protection for workers is that employers cannot terminate employment because of a single wage garnishment.
If facing financial hardship due to garnishment, employees can file a "Claim of Exemption" with the Sheriff's Department within 10 days after receiving notice from their employer. This claim asks the court to reduce or eliminate the garnishment based on financial necessity.
Tax withholding constitutes another mandatory deduction. Employers must withhold state and federal income taxes as well as Social Security and Medicare contributions from employee paychecks. The amount withheld depends on the employee's income and the allowances claimed on their W-4 or DE-4 forms.
Employee-Authorized Deductions in Writing
Under certain circumstances, employers may deduct amounts from wages with proper written authorization from employees. These authorized deductions typically include:
- Insurance premiums for various coverage types
- Health and medical coverage contributions
- Benefit plan payments
- Repayment of loans obtained from the employer
- Salary or commission advances
- Other voluntary contributions
The key requirement is that these deductions must be expressly authorized in writing by the employee before implementation. Employers should clearly explain all terms and conditions before obtaining the employee's signature to avoid future disputes.
Importantly, even with written authorization, employers cannot make deductions that would ultimately benefit the business operations or amount to a rebate from the standard wage. Several court decisions have further restricted this practice – for instance, the case of Barnhill v. Sanders established that even with written authorization, balloon payments on separation to repay employee debt constitute unlawful deductions.
Collective Bargaining Agreements and Statutory Deductions
The third major category of lawful deductions stems from collective bargaining agreements. When expressly authorized by a wage agreement or collective bargaining contract, employers may withhold:
- Union dues
- Negotiated contributions
- Health and welfare fund payments
- Pension contributions
These deductions must be explicitly permitted in the agreement and cannot be implemented unilaterally by the employer. In fact, California law makes it a criminal offense for employers to fail to make agreed-upon payments to health, welfare, pension, or vacation plans that benefit employees.
Employers who withhold any part of collectively bargained wages with intent to defraud violate state law. This provision prevents private agreements from nullifying collective bargaining contracts and protects the integrity of union-negotiated benefits.
It's worth emphasizing that employers who fail to remit withheld amounts (like payroll taxes) to the appropriate agencies may face criminal charges, with potential felony status if the unpaid amount exceeds $500.
Commission Advances vs. Earned Wages
Commission structures present a unique area of California wage law where employers may recover advanced payments under specific conditions. Understanding the distinction between advances and earned wages is crucial for both employers and employees.
Definition of Commission Advances Under California Law
Under California law, commissions are considered wages once they are earned. However, employers often structure compensation plans to include "advances" against future commissions. These advances function essentially as loans rather than earned wages. The critical difference hinges on when a commission is legally "earned." Once a commission is earned, it belongs to the employee and cannot be reclaimed by the employer. Yet, properly structured advance payments remain the employer's funds until specific contractual conditions are satisfied.
California courts recognize that employers and employees can contractually define when commissions become "earned." This distinction determines whether an employer can legally recover payments through chargebacks. Typically, commission agreements specify that commissions aren't fully earned until certain conditions occur, such as customer payment or expiration of cancelation periods.
Koehl v. Verio: Chargebacks Allowed for Unvested Commissions
In Koehl v. Verio, Inc., the California Court of Appeal established an important precedent regarding commission chargebacks. Sales associates at Verio received base salaries plus commission advances subject to chargebacks if customers canceled service within specific timeframes. The court upheld Verio's compensation plan that imposed chargebacks on accounts canceled within 270 days of activation.
The court's ruling hinged on the determination that these commissions were not yet earned wages, making the chargebacks lawful. Particularly significant was the court's finding that the compensation plan clearly differentiated between base salary (which was guaranteed) and commission advances (which were contingent upon customers maintaining service).
Steinhebel v. LA Times: Conditions for Commission Vesting
Subsequently, in Steinhebel v. Los Angeles Times Communications, the court further clarified commission vesting conditions. The case involved telesales employees who received commission advances for subscription sales. Their written agreement specified that commissions were subject to chargebacks if customers canceled within 28 days.
The court determined this 28-day requirement was a "condition precedent" to earning the commission. First, since the advances did not constitute earned wages (as all performance conditions hadn't been satisfied), the chargeback procedure merely reconciled unearned commissions by reducing future advances. Second, the court noted employees still received their full hourly minimum wage regardless of sales levels, providing essential financial protection.
Both cases highlight that employers must clearly define in writing when commissions vest and what conditions apply for chargebacks to be lawful.
Unlawful Deductions and Common Violations
California law outlines several common wage deduction practices that violate employee rights, even with the limited exceptions we've discussed. These unlawful deductions frequently impact workers across various industries and warrant careful scrutiny by both employers and employees.
Deductions for Customer Returns Without Agreement
Among the most frequent violations involves employers deducting wages for customer returns or business losses. California courts have consistently held that ordinary business losses must be absorbed by the employer as a cost of doing business. Employers cannot legally deduct funds from employee wages for:
- Customer theft or walkouts
- Cash shortages from registers
- Damaged or broken equipment
- Returned merchandise
The Industrial Welfare Commission (IWC) wage orders clearly restrict an employer's ability to make deductions for equipment loss, damage, or cash shortages. The only narrow exception occurs when the employer can definitively prove the loss resulted from an employee's dishonesty, willful act, or gross negligence – merely ordinary negligence is insufficient. Importantly, an employer's accusation alone does not justify deductions.
Clerical Errors and Retroactive Adjustments
Fixing payroll mistakes presents another area where employers sometimes violate wage laws. When overpayments occur through clerical errors, employers often attempt to recoup these funds through unauthorized deductions.
California courts view recovering losses from payroll errors with heightened scrutiny. Even with an employee's written consent, courts typically find such deductions impermissible since they effectively force employees to "insure" the employer against business errors.
When underpayment occurs, employers must promptly correct the error. The Nishiki case demonstrates how even small payroll errors can result in substantial penalties – a mere $80 underpayment resulted in waiting time penalties and significant attorney fees.
Hudgins v. Neiman Marcus: Unidentified Returns Case
The landmark Hudgins v. Neiman Marcus case established vital precedent regarding commission deductions. Neiman Marcus had implemented a policy deducting commissions for "unidentified returns" (returns where the original sales associate couldn't be identified) proportionally from all sales associates in that department.
The court ruled this practice violated Labor Code Section 221, which prohibits employers from collecting wages previously paid to employees. The court emphasized that once sales associates completed their duties and earned their commissions on completed sales, those commissions became wages that couldn't be reclaimed.
The court explicitly rejected the practice of "punishing all employees for the sins of a few". This ruling established that employers cannot shift business losses onto employees who had no direct connection to those losses. The decision reinforced that employers must bear ordinary business risks instead of transferring them to employees through wage deductions.
Best Practices for Employers and Employees
Proper documentation and clear communication form the foundation for lawful pay practices in California workplaces. Following established guidelines protects both parties from costly disputes and potential litigation.
Drafting Clear Commission Agreements
As of January 1, 2013, California Labor Code Section 2751 requires all commission plans to be in writing and signed by employees. These agreements must explicitly explain how commissions are computed and paid. Employers should clearly state when payments are considered "advances" rather than earned wages. Commission agreements must also remain in effect until superseded or until employment ends. A properly drafted plan should include:
- Detailed explanation of when commissions are considered "earned"
- Specific conditions for payment vesting
- Clear distinction between advances and earned commissions
Explaining Chargeback Conditions in Writing
For chargebacks to be enforceable, employers must include an explicit statement that payments are advances subject to potential chargebacks. The agreement should thoroughly explain:
- Specific circumstances triggering chargebacks
- Percentage or amount of potential chargebacks
- Timeline for chargeback implementation
Employers should also formally train employees on chargeback processes and properly label payments as "commission advances" on wage statements.
Employee Rights to Request Pay Records
Employees maintain legal rights to inspect their employment records. Upon request, employers must provide:
- Personnel records within 30 calendar days
- Payroll records within 21 calendar days
- Copies of any signed documents
Failure to provide these records within required timeframes results in a $750 penalty plus potential attorney fees.
Conclusion
California maintains some of the strongest worker protections in the nation regarding wage withholding. Therefore, both employers and employees must thoroughly understand these laws to navigate workplace compensation issues effectively. The California Labor Code clearly prohibits most forms of wage withholding while carving out specific exceptions for legally mandated deductions, written employee authorizations, and collective bargaining agreements.
First and foremost, employers should recognize that once wages are paid, they legally belong to employees. Consequently, attempts to reclaim these funds generally violate Section 221 of the Labor Code. However, properly structured commission advances represent a notable exception since they remain company property until specific conditions are met.
Additionally, employers must absorb ordinary business losses rather than passing them onto workers through unauthorized deductions. Unquestionably, this includes customer returns, cash shortages, and damaged equipment unless directly tied to employee dishonesty or gross negligence.
For employees facing questionable deductions, requesting payroll records represents an essential first step toward addressing potential violations. Meanwhile, employers should focus on creating clear, written agreements that explicitly state all conditions related to compensation and possible chargebacks.
Regardless of workplace position, understanding these fundamental wage withholding regulations protects against costly disputes and potential litigation. California's robust framework aims to balance legitimate business needs with fundamental worker protections, thus creating fairer employment relationships throughout the state.
References
[1] – https://www.dir.ca.gov/dlse/faq_deductions.htm
[2] – https://www.sheppardmullin.com/media/article/85_pub361.pdf
[3] – https://www.studicata.com/summaries/court-of-appeal-of-california/hudgins-v-neiman-marcus-group-inc-1995-jh5ghd/
[4] – https://www.littler.com/news-analysis/asap/put-it-writing-california-requires-written-commission-plans-beginning-january-1
[6] – https://selfhelp.courts.ca.gov/wage-garnishment
[7] – https://saclaw.org/resource_library/ej-wage-garnishment/
[8] – https://www.ftb.ca.gov/pay/withholding/index.html
[18] – https://law.justia.com/cases/california/court-of-appeal/4th/34/1109.html
[20] – https://calchamberalert.com/2022/07/22/personnel-payroll-record-requests-timely-response-important/
