Jan 8

Employer Payday Loans: Neither a Borrower Nor a Lender Be

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In troubled times, employees often ask their employers for advances. Typically, an employer will advance the employee money in return for his consent to the deduction of wages from his next paycheck. In other words, the advance is the functional equivalent of a payday loan. Unfortunately, this type of loan often traps an employee in a vicious circle of debt to his employer. The employee must borrow more and more – and take home less and less – just to pay off an employer payday loan. 

You might be surprised to learn that California law protects an employee from himself. Under Labor Code section 300, an employee may “assign” his wages to an employer loan shark only in the narrowest of circumstances. Section 300 thus reflects the strong public policy of “protect[ing] wage earners…against the possibility that, either from improvidence or under the stress of immediate necessity, they may go too far in sacrificing the future to the needs or desires of the present and leave themselves and their families without future means of support.”1

I. The Proper Formation of a Wage Assignment

Section 300 makes an employer jump through hoops before he can take a chunk out of an employee’s paycheck. The employer must notarize the wage assignment and include it in an “instrument” containing the employee’s signature and “identifying specifically the transaction to which the assignment relates.”2 The employer must attach to or include in the instrument two notarized statements by the employee: (1) a statement that “no other assignment exists in connection with the same transaction or series of transactions”3 (i.e., he isn’t taking out a loan to repay a loan); and (2) a statement that he’s unmarried, an adult, or both.4

The Legislature’s concern about the effect of a wage assignment on an employee’s family led the Legislature to require the employer to obtain the written consent of certain family members of the employee. The employer must attach to the instrument the consent of a married employee’s spouse to the wage assignment.5 (The spouse’s consent is unnecessary if the employee attaches to or includes in the wage assignment a notarized statement that the court has entered a judgment of legal separation or dissolution.6 ) The employer must also attach the written consent of a minor employee’s parent or guardian to the wage assignment.7

Finally, the employer must prepare a statement of his own: an itemized statement of the amount “then due” from the employee.8 The itemized statement must only “accompany,” rather than be part of, the instrument, which only makes sense because the amount “then due” (should) diminish over time as the employer periodically deducts the employee’s wages.9 That means the employer will have to periodically update the statement if necessary. The employer must then file away copies of the instrument, any attached statements and/or spousal or parental consent forms, and the itemized statement.10

II. The Maximum Assignable Amount of Wages

A. Earned Wages

Even if an employer properly forms and documents a wage assignment, Section 300 prohibits him from deducting more than 50% of an employee’s wages.11 Usually, the employer and employee will agree to a payment plan whereby the employer can continue deducting small installments until the balance on the loan drops to zero. The rules are slightly when the employment relationship ends. Even if the deduction is less than 50% of the employee’s wages, the employer can’t deduct a balloon repayment to offset the outstanding loan balance, regardless of whether he obtains the employee’s written consent to do so.12 

Even if a wage assignment is otherwise valid, an employer may never obtain one if he pays wages under a central payment plan.13 This kind of payment plan occurs when employees work for several employers in the same industry interchangeably, and those employers, or some of them, cooperate to establish a plan for the payment of wages at a central place or places and according to a unified schedule of pay days.14 In return, the employer doesn’t have to comply with the usual rules governing the payment of final wages (e.g., he doesn’t have to pay an employee at the place of discharge).15

B. Unearned Wages

In most cases, Section 300 bails out an employee from an employer’s payday loan altogether. The employer can’t withhold wages from the employee’s paycheck if the employee has yet to earn those wages.16 Of course, any wages an employee assigns will almost always be future wages. The law carves out a limited exception to this prohibition when the employer provides the employee with “necessities of life” – e.g., food, clothing, housing, medical care, and the like.17 Even then, the employer himself must directly provide the necessities and may only obtain a wage assignment equal to the amount necessary to furnish the necessities.

That almost never happens. Few employers other than fast food restaurants and coffee shops directly provide “necessities of life” to employees in return for assignments of future wages. In Lande v. Jurisich, 59 Cal.App.2d 613 (1943), the plaintiff borrowed money from the defendant in return for a lien on wages “hereafter to be earned.” The plaintiff brought an action for a declaratory judgment that the lien was an assignment of future wages, and because the defendant didn’t provide him with “necessities of life,” the lien was invalid. The trial court entered judgment for the defendant. The plaintiff appealed.

The Court of Appeal reversed. In doing so, the Court explained that the lien gave the defendant “an interest in plaintiff’s future wages which defendant did not have before.” Thus, the Court “regarded [the lien] as having transferred or ‘assigned’ that interest” to the defendant. The Court explained that the Legislature, “[b]y using the term[] “assignment’…, obviously sought to reach every form of instrument which would result in the impounding of a wage earner’s wages before he received them.” The defendant didn’t provide the plaintiff with “necessities of life,” just money, so the assignment of future wages was invalid.

Lest you think Lande is outdated, a bankruptcy court reached the same conclusion based on similar facts in In re Gwynn, 82 B.R. 121 (S.D. Cal. 1988). In Gwynn, San Diego Padres star Tony Gwynn granted First National Bank a security interest in his contract with the Padres, guaranteeing a $75,000 loan to his agent. After his agent defaulted on the loan, Gwynn filed for bankruptcy. The bank moved for relief from the automatic stay so it could foreclose on its interest in Gwynn’s contract. The court denied the motion, however, finding that the bank’s interest in Gwynn’s contract was an assignment of his future wages under Section 300.

The broad restrictions on the assignment of future wages mean that almost all loan repayment deductions will be invalid – the reason being that almost all of them will be of wages that the employee had yet to earn when he originally assigned them. Moreover, the “necessities of life” exception will almost never be available because any employer inclined to help his employee will loan him money so he can purchase the necessities of life himself. Even then, an assignment of future wages is revocable at any time by the employee.18 Simply put, the employer can’t deduct future wages if the employee objects.

  1. Fitch v. Pacific Fid. Life Ins. Co., 54 Cal.App.3d 140, 147 (1975). 

  2. Lab. Code §300(b)(1). 

  3. Lab. Code §300(b)(5),(7). 

  4. Lab. Code §300(b)(4),(7). 

  5. Lab. Code §300(b)(2). 

  6. Id

  7. Lab. Code §300(b)(3). 

  8. Lab. Code §300(b)(4), (6). 

  9. Lab. Code §300(b)(6). 

  10. Id

  11. Lab. Code §300(c). 

  12. Barnhill v. Robert Saunders & Co., 125 Cal.App.3d 1 (1981). 

  13. Lab. Code §300(f). 

  14. Lab. Code §204(a). 

  15. See Lab. Code §§201, 202, 208. 

  16. Lab. Code §300(h); see also Lab. Code §300(g)(employer may deduct wages for payment of goods or services that the employer has personally provided to the employee or the employee’s family at the employee’s request). 

  17. Boehm v. Superior Court, 178 Cal.App.3d 494, 502 (1986). 

  18. Lab. Code §300(e). 

Ben Rothman, Esq.

Ben Rothman is a Los Angeles-based attorney practicing in the areas of personal injury, employment, and workers' compensation on a "no recovery, no fee" basis. Call him at (424) 465-2948 for a free, no-obligation consultation.