Employees have the right to be paid fairly and on time for their hours worked, and employers are limited in how and when they can legally withhold wages. Unfortunately, cases of employers illegally withholding wages are unfortunately far too common. Employers who illegally withhold wages may be subject to a state and/or federal investigation, and the employer may be required to pay the employee damages in addition to the unpaid wages.

What qualifies as illegal wage withholding?

Generally speaking, there are four types of illegal wage withholding cases:

  • Failure to pay the minimum wage
  • Failure to pay overtime wages
  • Refusal to pay the full compensation due
  • Unlawful payroll deductions

Minimum wage and overtime withholding

The first two types of illegal wage withholding cases fall under the protection of the Fair Labor Standards Act (FLSA), the federal law that establishes the minimum wage, overtime requirements, recordkeeping requirements, and child labor restrictions. Under the FLSA, employers are required to pay employees fair compensation in a timely manner, usually by the next scheduled payday.

At the state level, Arizona law provides similar standards regarding fair and timely compensation. Federal and state law coincide on the subject of overtime pay and timely compensation, though Arizona imposes a higher minimum wage (currently $10.50/hour).

Refusal to pay the full compensation due

This matter may be influenced by the FLSA if the compensation due is based on the minimum wage or overtime requirements, but more often it’s a contract issue.  If the compensation due is based on an employment agreement or collective bargaining agreement, then the matter is a breach of contract and would be under the jurisdiction of state courts. Simply put, contracts are binding for all parties involved, so an employer who refuses to honor the terms of the contract may be liable for damages including back pay, front pay, and liquidated damages.

Unlawful payroll deductions

While it’s generally illegal for an employer to withhold an employee’s salary and wages, there are a handful of circumstances where withholding a portion of the employee’s paycheck is permissible:

  • Voluntary deductions – most employers withhold a portion of an employee’s paycheck to cover insurance premiums, retirement plan contributions, charitable donations, and union dues. These payroll deductions are legal as long as the employee authorizes them.
  • Court orders – when a judge authorizes payroll deductions to collect debts on behalf of a creditor (a practice known as wage garnishment), your employer is obligated to comply with the withholding order. Wage garnishment is often authorized to settle debts with the IRS, collections agencies, and unpaid child support.
  • Property loss – employers are permitted to deduct wages to pay for lost or damaged property, though the deductions can’t bring the employee’s compensation below the minimum wage.
  • Repayment – in some cases, employers are allowed to deduct the cost of workplace materials such as tools, uniforms, meals, and lodging from an employee’s paycheck. As with property loss withholdings, any lawful deductions for these matters can’t bring the employee’s compensation below the minimum wage.

Last paycheck requirements

Some of the most common wage complaints involve the last paycheck for employees who have quit or been terminated. While there are no federal laws regarding an employee’s final paycheck, most states have laws governing the timing of final paychecks. In Arizona, employers are required to pay a terminated employee their final paycheck within 7 working days or by the next payday, whichever is sooner (ARS 23-353). For employees who quit, the employer must issue the final paycheck by the next scheduled payday.

When it comes to withholding any portion of the final paycheck to recover lost or damaged property, the employer is only allowed to withhold the disputed portion of the paycheck. Unless the value of the lost or damaged property meets or exceeds the total value of the final paycheck, the employer cannot withhold the entire paycheck. If the withheld amount is reasonably disputed, the employer is expected to investigate and resolve the dispute in a timely manner (i.e. the employer can’t withhold the funds indefinitely).

Exempt vs. Non-exempt employees

It’s important to keep in mind that most employment laws only apply to employees on the payroll (aka non-exempt employees). Exempt workers typically work on a contractual basis, so rather than receiving a salary or hourly wages they receive payment that directly corresponds to the work they do. Examples of exempt workers include freelancers, contract workers, temp laborers, outside sales, and consultants.

The easiest test to determine whether a company views an employee as exempt or non-exempt is to see how the employee’s earnings are reported to the IRS. If the company issues a W2 tax statement, the employee is on the payroll; if the employee receives a 1099, the employee is considered exempt. Note, however, that employer misclassification is a massive issue in the United States right now, so it’s not uncommon to see non-exempt employees misclassified as exempt employees. Whether the misclassification is intentional or not is irrelevant—if you’re legally an employee, you’re entitled to the rights and protections afforded to non-exempt employees. If you believe you are being misclassified by your employer, you should speak with an employment law attorney as soon as possible.

If you are properly classified as an exempt employee, don’t worry—you may not be covered by many of the major employment laws, but you still have core rights to protect you in the workplace. The only difference is rather than seeking recourse in federal courts under federal laws, you can seek damages and restitution from your employer in state court under standard state laws (e.g. contract/tort law, personal injury claims, etc.).

Legal consequences for wrongfully withholding salary and wages

If your wages have been wrongfully withheld by your employer, the first step is to consult with an employment law attorney. An experienced attorney can assess your case, calculate the amount of damages you may qualify for, and determine how you should proceed with your case. If the withheld wages and damages are small, your attorney may be able to resolve the issue by drafting a formal letter demanding payment from your employer.

If you submit a formal letter and your employer refuses to pay your withheld wages, you and your attorney have several options. If your compensation is based on the minimum wage or involves overtime pay, you may file a complaint under the FLSA with the Department of Labor’s Wage and Hour Division (WHD). You can also file a complaint with the Industrial Commission of Arizona’s Labor Department (ICALD) if the disputed wages are less than $5,000 and the period in question is less than one year.

If the amount of unpaid or withheld wages is substantial, your attorney may advise you to seek restitution through civil court rather than filing a complaint with a federal or state agency. In a successful civil court case, you may receive triple the amount of unpaid wages (ARS 23-360).

Need Help With An Employment Law Issue?

The state of Arizona is a great place to live and work, but knowing the employment laws will help you a lot. Whether you are a newcomer to the state or a lifelong resident, understanding your workplace protections is good for your career, and the more you know, the better.

Employment law issues can cause extreme distress and can affect productivity on the job. If you are being harassed at work, or dealing with any other employment issue, consider talking to our AZ employment law team to help you settle your case.

Call our Employment Law team at (480) 464-1111 to discuss your case today.

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