Lessons in payroll deductions in Iowa: Advances on wages, personal expenses, and escrow accounts for property damage

In its March 11, 2015, decision in Mujkic v. Lynx, Inc. (No. 14-0636), the Iowa Court of Appeals was presented with several claims under the Iowa Wage Payment Collection Act, Iowa Code Chapter 91A. Some of plaintiff Rifet Mujkic's claims were rejected because the court found he was an independent contractor of Lynx during the last part of his work there. By its terms, the Iowa Wage Payment Collection Act applies only to employees, and the decision includes a good discussion of the difference between employees and independent contracts for purposes of that statute. However, for about his first two months at Lynx, Mujkic was truly an employee, so Chapter 91A applied to protect his wage payments during small sliver of time. Mujkic was first hired by Lynx as a truck driver and was paid on a per-mile basis. The company was responsible for all of the operating expenses for the company-owned vehicle he was assigned to drive (e.g., fuel, tolls, repairs, insurance, registration). Lynx drivers were also provided a 'T-Check' account card to pay for fuel. To use the card, the employee was required to either enter a PIN or to sign something at the point of purchase. 'With pre-approval from Lynx, drivers could also receive cash advances for personal expenses by using the T-Check system. If advances were made, the company deducted them from its drivers' paychecks.' Lynx took money from the paychecks of employee to fund an 'escrow account' for the employee. The deductions were $100 per paycheck, taken until the employee's escrow account maximum of $1,000 was reached. The escrow account was used to 'cover insurance deductibles for accidents caused by Lynx drivers.' Any money remaining in the Lynx employee's escrow account at the end of employment was paid to the employee. Iowa Code Section 91A.5(1)(b) provides:

1. An employer shall not withhold or divert any portion of an employee's wages unless:

a. The employer is required or permitted to do so by state or federal law or by order of a court of competent jurisdiction; or

b. The employer has written authorization from the employee to so deduct for any lawful purpose accruing to the benefit of the employee. 

Lynx, Inc. did not have a written authorization to make deductions for either the escrow account or the reimbursement of advances made through T-Check from Mujkic's paycheck. The court ruled that the absence of a written authorization was not fatal to Lynx for the money it advanced Mujkic for personal use through the T-Check system because:

[T]he challenged deductions were not wages 'owed' or 'due' to him. The evidence presented at trial established the T-Check advances made to Mujkic were moneys paid by Lynx in advance of when Mujkic earned them. Consequently, the subsequent payroll deductions were not withholdings of Mujkic's wages due or owed, because the money deducted was not then due and owing to Mujkic it had already been paid. The T-check deductions were merely reimbursements to Lynx for advances on wages Mujkic expected to earn. In other words, if not for the T-Check deductions, Mujkic would, in effect, be indebted to Lynx.

Lynx was not so lucky with regard to the escrow deductions taken from Mujkic's pay checks:

We reach a different conclusion as to the escrow payments. . . . Lynx's action in withholding escrow payments from Mujkic's wages in February and March 2012 without written authorization from Mujkic constituted a violation of chapter 91A. Further, the deductions were not for the benefit of the employee. The deductions were withheld to reimburse the employer for property damage occurring to the employer's vehicle. Such deductions are expressly prohibited by statute.

Indeed, section 91A.5(2) lists prohibited pay check deductions including those for losses due to breakage or damage to property. In summary, the Iowa Court of Appeals held that an advance on wages can later be deducted from wages due without a written authorization; but a deduction to cover damage to the employers property can never be taken from wages paid to an Iowa employee, even if the employee provided written authorization for such a deduction. Taking it a step beyond the court's decisions, Iowa employers can 'true up' a later pay check if an earlier pay check to the employee contained an error or overpayment. In that case, the correcting deduction can be subtracted from the gross pay (because the employer has already withheld taxes, including Social Security and Medicare, and paid the employer's share of taxes). That is different from an employer's attempt to collect a debt it claims the employee owes the company by making a unilateral deduction. Regardless, because of the number of calls I have received (and amounts involved in some of the calls), I am not a fan of employers letting employees charge personal expenses on an employer's business account, or employers giving advances against the employee's future earnings, as happened here. That said, I recognize that it is the employer's business and it can do as it likes. But, it seems to me that each instance of such use is a loan to the employee – and a loan based on the employer's credit. Prudent business practices suggest that any loan be documented in writing so that there is a mutual understanding of its terms. The court's opinion doesn't specify how much money Mujkic obtained for his personal use through 'T-Check' advances – money he subsequently claimed was wrongfully subtracted from his paycheck, so he should get it back (plus liquidated damages, and attorney fees). Even though Lynx successfully defended the claim for T-Check advances, how much money did it have to pay its attorneys to defend against the claims claims brought by an employee who was a friend of the owner since childhood in Bosnia? A written agreement might have cut that claim off at a much earlier stage, if not altogether. Imagine the chagrin if the employee had been successful and had been awarded the amount withheld plus an equal amount for liquidated damages plus several thousand dollars in attorney's fees and costs, and the employer additionally had to pay for its own lawyer and was unable to recover the 'advances' (the loans to the employee). That is a fairly negative impact on an employer's balance sheet that could have been cured by a written agreement. So…Iowa employers, have you gone through all of the paperwork you have individuals sign when starting employment to assure that you have appropriate authorizations for all deductions you may want to make from an employee's paycheck? And are all of those deductions you plan to take actually lawful under Iowa's Wage Payment Collection law? 

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.