Departing employees can end up owing their employer money for a variety of reasons. A few examples include overpayments by the employer, outstanding loans or pay advances, advances on vacations or other paid leaves, damaged property or equipment, etc.

An employer's likelihood of being able to recover money for these purposes depends in large part on the employer's diligence in maintaining the right policies, using the correct implementing documents, compliance with applicable laws and constant improvement in the employer's processes.

Although each situation is different, this article provides some general recommendations for employers who find themselves in situations where a department employee owes them money.

1. Anticipate and plan for these situations

Anticipating and planning in advance for the departure of employees owing money is critical. If an employer waits until the employee has left the employ of the employer, the employer has far fewer options for ever collecting the money form the departed employee.

2. Maintain the right policies

Having the right polices in place is a critical step in establishing options for recovering money from departing employees. Among others, employers should consider adopting policies addressing the following topics:

  • overpayments
  • deductions from pay
  • loans
  • pay advances
  • vacation or paid leave advances
  • tuition or educational payments
  • return of property

These policies can articulate the circumstances, terms and conditions under which the employer will make these payments or deductions and explain the consequences of nonpayment by a departing employee.

3. Use the right implementing documents

In addition to having the right general policies, employers need to use documents in each situation to protect against employees who do not voluntarily pay back money to the employer upon their departure. Among the other implementing documents, employers should consider using:

  • formal loan agreements
  • promissory notes
  • receipt forms for property such as electronic devices, tools, equipment or clothing
  • deduction authorization forms or language embedded in other forms
  • nondisclosure or other agreements imposing post-termination requirements such as the return of property
  • standalone memos memorializing the specific terms and conditions of the arrangement

4. Comply with state and local laws

An increasing number of state and local laws apply to deductions from wages or salaries or impose other limitations on an employer's ability to charge for or collect money from an employee. Before adopting a policy and implementing documents, employers should review and comply with these applicable laws.

For example, some states require an employer to get a written authorization prior to making any deduction from an employee's paycheck. Moreover, employers can be assessed punitive or liquidated damages for improper pay practices.

5. Comply with the Fair Labor Standards Act

The Fair Labor Standards Act can come into play in several ways in making deductions from the employee's pay. For example, the pay of a nonexempt employee should not be reduced below the minimum wage for all hours worked in the work weeks of the final pay period.

Thus, it would be a violation of that law to reduce a cashier's pay below the applicable minimum wage because of cash shortages, unreturned uniforms or tools. On the other hand, an employer could reduce the pay of a nonexempt employee below the minimum because of a cash advance — assuming compliance with other applicable laws, such as one requiring all deductions to be in writing.

In addition, one of the conditions of the executive and administrative exemptions is that the worker be paid on a "salary basis" of pay. Certain deductions can "destroy" the salary basis of pay, thus making the worker ineligible for those exemptions.

6. Consider all of the options

Several options exist when trying to collect money from a departing employee including, among others:

  • ask the departing employee to voluntarily repay the money owed
  • deduct the money owed from the final paycheck — to the maximum extent permitted by law and in compliance with any state or local laws requiring written authorizations or other conditions
  • enter into an installment agreement with the employee and get the employee to sign a binding promissory note
  • threaten to sue or actually sue the employee in court to collect the money owed
  • forgive the employee, save collection expenses and write off the money as an uncollectable debt

7. Fix any problems you may discover

If the employee left owing money that was a result of a mistake, such as an erroneous overpayment or a failure to get a wage deduction or property receipt form, the most important thing is to fix the problem so it does not occur again. When faced with a collection situation, the employer should always reflect on the circumstances and see if there are any process improvements, including shoring up or adding new documents to the process.


Many scenarios exist where employees can leave an employer owing the employer money. Hopefully, the guidelines in this article serve as a starting point for situations where an employer needs to recoup money from a departed employee.