Seyfarth Shaw LLP | www.seyfarth.com Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) 27 IV. Unlawful Deductions from Wages A. Generally A second allegation commonly made in Labor Code class actions is that the employer unlawfully deducted from the employee’s wages. Plaintiffs have used these allegations to challenge policies designed to hold employees liable for cash shortages or theft, to pay bonuses based on net profits, and to advance commissions subject to recoupment or “chargeback.” Under California law, an employer cannot deduct from an employee’s wages to account for losses to the business that occurred as a result of simple negligence or through no fault of the employee. Courts have held that such losses are part of the cost of doing business and, therefore, should be borne by the enterprise rather than the individual employees. This principle is codified specifically in Section 8 of the Wage Orders: No employer shall make any deduction from the wage or require any reimbursement from an employee for any cash shortage, breakage, or loss of equipment, unless it can be shown that the shortage, breakage, or loss is caused by a dishonest or willful act, or by the gross negligence of the employee. In dicta, several California cases have indicated that this rule extends beyond deductions for cash shortage, breakage, or loss of equipment. The seminal case on this issue, Kerr’s Catering Service v. Dep’t of Industrial Relations,133 held only that the IWC had the authority to promulgate Section 8. In explaining its reasoning, however, Kerr’s Catering used sweeping language and invoked several provisions from the California Labor Code, such as Section 221 (which precludes an employer from demanding that an employee pay back wages once the wages are earned), and Sections 400-410 (which limit employers’ rights to seek cash bonds from employees). Kerr’s Catering did not hold that those Labor Code provisions barred deductions for cash shortages, but rather held that the public policies that underlie those Labor Code sections gave the IWC authority to enact Section 8. Later cases read Kerr’s Catering to say that the Labor Code itself barred deductions for “unanticipated losses” or “business losses that may result from the employee’s simple negligence.”134 By attributing this anti-deduction rule to the Labor Code rather than the Wage Orders, these decisions effectively moot Section 1(A) of the Wage Orders, which provides that the anti-deduction rules within Section 8 do not apply to exempt administrators, professionals, or executives.135 If the anti-deduction rule stems from the Labor Code rather than Section 8, then it applies to both non-exempt and exempt employees. 133 57 Cal. 2d 319, 329 (1962). 134 Hudgins v. Neiman Marcus Group, Inc., 34 Cal. App. 4th 1109, 1118 (1995) (discussed below in Section IV.C.1); see also Quillian v. Lion Oil Co., 96 Cal. App. 3d 156, 162-63 (1979) (citing Kerr’s Catering for the principle that the Labor Code itself bars unexpected deductions for losses not the result of an employee’s willful misconduct). 135 Section 1(A) provides that “[p]rovisionsof Sections 3 through 12 shall not apply to persons employed in administrative, executive, or professional capacities.” IWC Wage Order 1-2001(1)(A).
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