A terminated employee has not returned company equipment. Can the employer hold the paycheck until the equipment is returned, or deduct the cost from the final pay?

An employer cannot withhold a terminated employee's paycheck until equipment is returned. On a federal level, the Fair Labor Standards Act (FLSA) mandates that wages are due on the next regular payday for the covered pay period, and several states have clear provisions when an employee must receive payment upon termination. There are no exceptions related to unreturned equipment, therefore pay cannot be withheld past these requirements.

An employer might be able to deduct the cost of the equipment from the final pay of non-exempt employees. The specific circumstances of the situation and state wage deduction laws will determine whether an employer can do this. Generally, state wage deduction laws allow employers to deduct monies from an employee's pay required by law (e.g., federal and state taxes, Social Security), benefit deductions, or deductions ordered by a court or collective bargaining agreement. In some states, the wage deduction laws will allow an employer to make other deductions if the employer has written authorization from the employee. If the employee works in a state that does not prohibit this type of deduction, then the employer can withhold the cost of the item from the employee's pay with the written authorization. However, there are some states, like California, that—even with written authorization from an employee—have additional restrictions that the employer must follow. If an employer reviews state wage deduction and wage payment laws to find they cannot deduct from pay, then an employer might consider invoicing the employee for cost of the equipment or pursue the matter by taking the former employee to small claims court to receive a legal judgment against that person for the cost of the item.

Additionally, the FLSA does not allow deductions to take an employee's pay below minimum wage, unless that deduction is for the employee's benefit, such as an insurance premium contribution.

The U.S. Department of Labor opinion letter FLSA2006-7 advises employers that deductions from an exempt employee's pay to reimburse the employer for lost or damaged equipment would violate the salary basis rule and is not permitted.