NYS Legal and Illegal Payroll Deductions in Business and at Work

This story about the payroll company that late last week shut down abruptly, resulting in their ACH vendor reversing the direct payroll deposits (in some cases, withdrawing previous payroll direct deposits from employee accounts not one but multiple times, sending their accounts into the negative and jeopardizing their ability to pay rent and other essentials) of thousands of employees of their employer clients nationwide and in NYS is heartbreaking to say the least, as well as unethical and potentially illegal. (And for the record, payroll and benefits are accounting and tax functions, different from HR. No ethical payroll or benefits professional would let something like this happen. As an FYI: HR typically gets involved in ensuring payroll compliance – and no ethical HR professional would let this happen, either.)

The best advice I’ve read at this writing is that impacted employers and employees alike need to reach out to their respective banks – specifically, employees need to contact their bank branch manager ASAP and file an “unauthorized ACH transaction” report; other payroll experts are stating that by law, the bank must honor your challenge of the unauthorized ACH transaction and reverse the withdrawal pending investigation.

While the spotlight is on unauthorized payroll reversals / deductions, this is a good time to reiterate the NYS guidelines for legal and illegal payroll deductions:

Legal payroll deductions in NYS:

Section 193 of the New York State Labor Law

§ 193. Deductions from wages.

1. No employer shall make any deduction from the wages of an employee, except deductions which:
a) are made in accordance with the provisions of any law or any rule or regulation issued by any
governmental agency including regulations promulgated under paragraph c and paragraph d of this
subdivision; or

b) are expressly authorized in writing by the employee and are for the benefit of the employee, provided
that such authorization is voluntary and only given following receipt by the employee of written notice of
all terms and conditions of the payment and/or its benefits and the details of the manner in which
deductions will be made.

Such authorized deductions shall
be limited to payments for:

(i) insurance premiums and prepaid legal plans;
(ii) pension or health and welfare benefits;
(iii) contributions to a bona fide charitable organization;
(iv) purchases made at events sponsored by a bona fide charitable organization affiliated
with the employer where at least twenty percent of the profits from such event are being
contributed to a bona fide charitable organization;
(v) United States bonds;
(vi) dues or assessments to a labor organization;
(vii) discounted parking or discounted passes, tokens, fare cards, vouchers, or other items
that entitle the employee to use mass transit;
(viii) fitness center, health club, and/or gym membership dues;
(ix) cafeteria and vending machine purchases made at the employer’s place of business and
purchases made at gift shops operated by the employer, where the employer is a
hospital, college, or university;
(x) pharmacy purchases made at the employer’s place of business;
(xi) tuition, room, board, and fees for pre-school, nursery, primary, secondary, and/or postsecondary
educational institutions;
(xii) day care, before-school and after-school care expenses;
(xiii) payments for housing provided at no more than market rates by non-profit hospitals or
affiliates thereof; and
(xiv) similar payments for the benefit of the employee.

Illegal payroll deductions include but are not limited to:

• Breakages
• Cash shortages
• Fines
• Losses to the business
• Deductions not listed in Section 193 of the Labor Law
• Charges for check replacement
• Overcharges for paid family leave premiums

Some deductions from wages, such as taxes or insurance premiums, are legal. Deductions from wages for pay advances or overpayments are only legal if they are made in accordance with Part 195.

The LS 605 provides more information on both illegal and legal deductions.

How do you ensure that you have proper written employee authorization to make payroll deductions, and that your organization is making legal NYS payroll deductions, in business and at work?