A recent decision by the Massachusetts Supreme Judicial Court holds that an employer may not deduct money from an employee’s paycheck to compensate it for damage the employee has done to its property without running afoul of the Massachusetts Wage Act, G.L. c. 149, § 148.

In Camara v. Attorney General (SJC-10693) (January 25, 2011) (slip opinion here), the Court was faced with the following facts: ABC Disposal Services, Inc. (ABC) provides waste collection and recycling services in the New Bedford, Massachusetts area. Its employees have occasionally caused damage to company trucks and to the personal property of others while driving their routes. In an effort to promote safety and to reduce the number of accidents caused by its employees, ABC established a policy by which employees who were determined to be at fault for causing damage were given the option of either accepting disciplinary action or agreeing to set off the cost of the damage against their wages. Under the policy, determination of an employee’s fault was made exclusively by the company and was not subject to appeal. For those employees who agreed to a setoff, the average amount was between $15 and $30 per paycheck.

Apparently, one or more employees weren’t too happy about the setoff policy because in early 2006 the Attorney General’s office showed up and conducted an audit of payroll deductions for the previous two years. The audit revealed that under its setoff policy, ABC had deducted more than $21,000 from the wages of 27 different employees during the two-year period. Finding that the setoff policy violated the Wage Act, the Attorney General issued a civil citation against ABC, requiring it to make restitution to the employees and pay a civil penalty of almost $9,500. ABC appealed the Attorney General’s finding to the Superior Court, where the judge ruled in ABC’s favor and invalidated the citation.

The SJC reversed the Superior Court. In ruling against ABC, the Court reiterated that the Wage Act – the purpose of which is to protect employees and their right to wages – requires prompt and full payment of wages due an employee. To advance its underlying purpose, the Act prohibits “special contracts” between an employer and an employee by which the employee agrees to accept less than the full amount of wages due. The Court agreed with the Attorney General’s position that under the Act, “regardless of an employee’s agreement, there can be no deduction of wages unless the employer can demonstrate, in relation to that employee, the existence of a valid attachment, assignment, or setoff ….” The Court found that ABC’s setoff policy constituted the type of “special contract” generally prohibited under the Act.

The Court then turned to the question of whether the wage deductions ABC took constituted a valid setoff . The Attorney General argued that valid setoffs “implicitly involve some form of due process through the court system, or occur at an employee’s direction and in the employee’s interests.” In finding that ABC’s deductions were not a valid setoff, the Court held that ABC failed to establish that any of the employees in question were legally liable for damages, or that ABC was legally required to make payments to third parties on behalf of the employees. The Court found that even though the employees agreed to the wage deductions, they did not owe ABC a “clear and established debt,” which is a prerequisite for a valid setoff. The Court was particularly troubled by the fact that ABC was the “sole arbiter” of whether an employee was liable for damage caused to a company truck or to a third party’s property. The Court held that such unilateral decisionmaking, without any appellate process, did not establish that the employees owed ABC a clear and established debt. Consequently, the Court struck down the setoff policy.

The Camara decision is another example of the wage and hour minefield that employers must navigate on a daily basis. Before implementing a policy or procedure that affects employee pay, employers are encouraged to consult with experienced employment counsel.

This article originally appeared in Stephen B. Reed’s site, The Management-Side Lawyer.

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