Failure to Return Company Property: What Are the Payroll Rules?

It's common for employers to entrust company property to employees, such as:

Office keys.
Building entrance badges.
Uniforms.
Computers/laptops.
Cellphones.
Vehicles.
Job-specific tools or equipment.

If the employee is terminated and does not return the property, you may be tempted to hold back their final pay until they do return the item.

However, withholding the employee's final paycheck is against the law.

The Fair Labor Standards Act (FLSA) requires employers to pay all wages due for the pay period by the employee's next regularly scheduled payday. This means that when an employee terminates, you must deliver their final wages by their next payday — regardless of whether they return company property. In other words, if the employee fails to return the item, you cannot hold their final paycheck hostage.

Most states also have final paycheck laws that mandate the deadline for giving terminated employees their final wages.

However, if the employee is non-exempt, you may be able to dock their wages.

Under the FLSA, you can make deductions for unreturned company property if the employee is non-exempt and the deduction does not drop the employee's pay to below the minimum wage or reduce overtime wages owed to the employee.

Be sure to check your specific state laws, because many states restrict the types of deductions that can be made from final wages. For example, some states let employers deduct wages for unreturned property only if the employee consents in writing. A state may also require employers to give employees advance notice of the deduction. For instance, employers in North Carolina must provide at least seven days' notice.

Some states do not allow the deduction at all. For example, employers in Delaware cannot make deductions for failure to return company property.

If the employee is exempt, you cannot make a deduction.

In FLSA 2006-7, the U.S. Department of Labor says that employers cannot dock an exempt employee's salary to recover the cost of unreturned company property even if the employee authorizes the deduction.

The DOL's reasoning.

Per the FLSA's salary basis rule, exempt employees must receive their full, guaranteed salary each payday, unless there's a permissible deduction. Deducting for the loss, damage or destruction of company property is not permissible because it violates the salary basis rule.

Employers can choose to take legal action.

Not being able to recoup the cost of unreturned property via payroll deduction does not mean all is lost, as employers have the option of filing a lawsuit against an employee. Whether it's worth taking legal action depends on several factors, including the value of the property and the severity of the situation.

Make sure to set expectations upfront.

A best practice is to develop strong policies and procedures regarding the receipt, use, care and return of company property. Incorporate the information into your employee handbook, which should be distributed to all employees. Make sure to also consult an employment lawyer before pursuing any sort of legal action.

If you need assistance, our HR Resource Center provides unlimited access to confidential advice from employment lawyers, a simple handbook builder, state-related resources, and more. All new ConnectPay clients automatically receive a 6-month free trial of the HR Resource Center to try out the platform.