Can a public agency deduct an overpayment directly from an employee’s paycheck without running afoul of the Labor Code? Two recent cases shed new light on this long-debated issue. In Stone v. Alameda Health Sys., (2024) 16 Cal. 5th 1040, and Bath v. State of California (2024) 105 Cal.App.5th 1184, California courts confirmed that the Labor Code does not apply to public employers unless the statute clearly says so. This reasoning casts doubt on whether Labor Code section 221, which prohibits employers from collecting or receiving any portion of wages already paid to an employee and section 224, which permits an employer to withhold or divert any portion of an employee’s wages when required by law, expressly authorized in writing by the employee, or authorized by a collective bargaining agreement, apply to public agencies at all. For HR professionals and payroll administrators, these rulings create both opportunities and risks that demand attention.
In Stone, the California Supreme Court held that Labor Code provisions apply only to private employers unless the statute expressly provides otherwise. Looking at the plain language of Labor Code sections 221 and 224, which address overpayments, these statutes do not expressly provide that they apply to public employers.
Shortly after Stone was decided, the Court of Appeal applied the same reasoning in Bath. There, the court held that Labor Code section 222, which is located in the same chapter as sections 221 and 224, does not apply to public employers because the statute contains no express reference to them. Section 222 makes it unlawful for an employer to withhold any portion of wages that have been agreed upon in a collective bargaining agreement. By extending the reasoning in Stone, the Bath decision strongly suggests that other wage payment provisions within the same chapter, including sections 221 and 224, may also be inapplicable to public agencies.
What this means for overpayments and recoupments
In light of Stone and Bath, there is a strong argument that Sections 221 and 224 of the Labor Code do not apply to public employers. If so, public agencies may have greater flexibility to address overpayments.
However, the issue is far from settled. No appellate court has directly addressed whether sections 221 and 224 are inapplicable to public agencies. Until such a decision arrives, or the Legislature clarifies the issue, uncertainty remains. Even if the statutes are not technically binding, there is a strong public policy in California disfavoring “self-help” actions by employers, such as unilaterally deducting wages without employee authorization. Ignoring this risk can invite litigation on public policy or other grounds, despite the favorable direction of the law.
Practical Guidance for Public Agencies
Even with favorable court rulings, public agencies should proceed cautiously. The safest approach is to notify the employee of any overpayment and seek a written repayment agreement. If the employee refuses to repay or breaches the agreement, the agency should consider pursuing recovery through the courts, rather than deducting directly from wages. This approach minimizes exposure to legal claims and reinforces commitment to lawful, respectful employment practices.
Conclusion: Proceed with Caution, Not Assumption
Public agencies should take this moment to review their wage deduction policies, train staff on best practices, and consult with trusted legal counsel to ensure their approach aligns with both the latest case law and sound employment practices. Proactive steps now can help your agency avoid costly disputes later.
The legal standard may be evolving, but prudence and transparent communication remain the best foundation for public agency employment practices.