Can a Company Withhold Final Pay for Monies Owed?

by Grace Ferguson, studioD

Mandatory deductions such as payroll taxes are a given from final wages because they are legally required. However, withholding for money that a terminated employee owes your company depend on state law. Consult your state labor department before making such deductions.

Mutual Agreement

The state generally does not allow employers to totally withhold an employee's final pay. However, it might allow you deduct from final pay to recover money owed if the employee agreed to it. For example, in Washington, you may reduce final wages if an oral or written agreement exists between you and the employee. You may deduct for breakage, damage or loss of company equipment; employee theft; and, in some cases, cash register shortages, if the deduction does not cause the employee's pay to fall below the required minimum wage. In Washington, these deductions are legal only if the incident occurred during the employee's last pay period. For all other types of oral or written agreements, you may reduce final pay to below the required minimum wage only if the agreement will benefit the employee.

Paycheck Loans

State law might have specific requirements for withholding money owed for paycheck loans. In California, an employer may deduct only the installment amount. It cannot deduct a lump sum or balloon payment for the outstanding balance. Let's assume you loaned an employee $1,000, to be repaid in $250 increments over four pay periods. Upon her departure from the company, she had made only two installment payments, or $500. In this case, you may withhold only $250 from her final pay.

Time Frame

If deductions to recover money from an employee are allowed in your state, consult the state labor department for final paycheck due dates. In Colorado, depending on how an employee's separation happened, final pay might be due immediately or by the next regular pay day. Colorado also allows an employer to deduct for the value of property or the amount of money an employee failed to return or pay. In this case, you would have 10 days to audit and modify your accounts before paying final wages.


If state law forbids you from making deductions to recover money owed or if the deduction amount does not cover what is owed, you may file a lawsuit in court against the employee. Before you do so, ensure you are legally allowed to make the deduction and that the employee actually owes you money. In California, you cannot deduct from wages if an employee loses company money or breaks equipment by accident. If the incident was not the employee's fault or if it was a case of simple negligence, California courts deem such occurrences inevitable in any business, so you must absorb the losses. For example, if a customer pays an employee with a bad check or if a worker breaks a company item by mistake, you cannot deduct the losses from her final pay. To recover unpaid money in court, you must prove the incident happened because of an intentional or dishonest act or gross negligence on the employee's part.

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