Deducting Negative Leave Balances for Employees

Employers are frequently faced with the issue of whether they can deduct the value of an employee’s negative leave balance from the employee’s final paycheck. The issue typically arises where an employer’s vacation, sick, or paid time off policy allows employees to borrow against future accrual and the employee quits or is fired without “earning back” the borrowed leave. As summarized by the Oregon Bureau of Labor and Industries’ website, the rule is employers may legally make a deduction from a final paycheck for a cash loan to an employee, if the employee has voluntarily signed a loan agreement, and the loan was for the employee’s sole benefit. Further, the deduction from the final paycheck for repayment of a loan may not exceed 25 percent of the employee’s disposable earnings OR the amount of disposable earnings in excess of $218 per week, whichever is less.

Assuming that an advance of pay for leave is analogous to a cash loan to an employee for the employee’s sole benefit, an employer may deduct the negative balance if the employee has voluntarily signed a loan agreement. The agreement may be as simple as a provision stating that: “Employee agrees that the Company may deduct any negative leave balance for leave advanced to me by the Company from my final paycheck, to the extent permitted by law.” To avoid a leave balance greater than 25 percent of the employee’s disposable earnings, employers should also consider limiting the amount of leave that will be advanced. For example, an employer’s leave policy could state that “Employees may use [vacation, sick, paid time off] before it is accrued. However, in no event may an employee accrue a negative balance of more than 3 days.” Then, employers need to carefully track employee leave and notify employees when they have reached their borrowing limit.

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