Oregon Employers Should Take Care with Employee Payroll Deductions

Oregon employers should be aware that when they deduct amounts from an employee's wages they have only seven days to pay the withheld amounts to the employee's intended recipient, unless the employee agrees to another deadline. This "seven-day rule," a little-noticed provision passed by the Oregon Legislature in 2007, applies to deductions for things such as charitable contributions, union dues, parking and transit, day care and certain insurance plans. The seven-day rule also applies to required deductions without another specified time for payment such as child support. The penalties are potentially severe for failing to satisfy this new requirement, which first became effective in 2008.

Employers typically require employees to sign a consent form in connection with any payroll deduction, such as with health insurance premiums, charitable contributions, parking, etc., but the consent forms rarely specify when the employer will pay the withheld amount to the intended recipient. In some cases the governing law imposes a timeframe, such as with the rules governing 401(k) plans or tax withholding. However, in many cases there is no other law requiring a payment timeframe, which means that if the underlying consent form does not specify a timeframe, the seven-day rule will apply.

Penalties

Violation of the seven-day rule can trigger severe penalties. The Oregon Bureau of Labor and Industries can assess a fine of $1,000 per violation. Also, an employee can seek the greater of actual damages or $200, plus attorney fees. In addition, if the violation occurs in connection with a final paycheck, the employee could also claim penalty wages (i.e., regular daily pay for up to 30 days) until the wrongful deduction is processed.

Example:

Assume an employer runs payroll twice a month and an employee has elected for $10 to be taken from each check and paid to a designated charity. For convenience, the employer batches the charitable deductions of all employees and pays them to the charity once a month, 10 days after the end of the month.

Under the new seven-day rule, the amounts withheld in the middle of the month are late by as many as 19 days, and the amounts withheld at the end of the month payroll are late by three days. For just the one employee, there are two violations, for $200 each, plus attorney fees. If the violation occurred when the employee had terminated employment, there could be additional penalty wages that would accrue until the amounts were paid.

With multiple events and employees, an employer's potential liability could quickly swell to a large amount, and there would be no reduction for acting in good faith to carry out an employee's desired wishes on payroll deductions that benefit the employee.

Express Employee Consent to Payment Date

To avoid such liability, employers should include the respective payment deadline on all of the payroll deduction forms an employee signs. In other words, if an employee agrees on an applicable consent form to a specified payment schedule, that timeframe overrides the seven-day default timeframe. Employers should not rely solely on written policies of the payment date, even if such policies are distributed to employees. It is not clear whether such general statements of policy would constitute the employee's “agreement” to a payment date.

Applicable Deductions

The seven-day new rule applies to the following deductions:

• Union dues
  
  
• Charitable contributions
  
  
• Employee transit and parking
  
  
• Credit union contributions
  
  
• Vacation savings plans
  
  
• 403(b) plans for nonprofit organizations not subject to the Employee Retirement Income Security Act of 1974 (ERISA)
  
  
• Some types of cafeteria plans and insurance plans
  
  
• Day care deductions

As noted, other types of deductions, such as tax withholding and child support payments, have their own legally required payment timeframe. ERISA generally preempts state law with respect to employer-provided employee benefit plans. ERISA fixes an independent timeframe for processing plan-related employee deductions, such as to a 401(k) plan or health insurance plan, and such timeframe should preempt the seven-day state period, though the issue has not been specifically litigated and some types of employee benefit plans are not governed by ERISA, including some types of health reimbursement arrangements.

As a result, we recommend that with respect to each form on which an employee requests amounts to be deducted from his or her paycheck, such form describe the exact timeframe for the employer's payment to the intended recipient. (And, of course, employers should make sure to complete payments within the designated timeframe.)

Employers: Please contact your DWT Employment or Employee Benefits attorney.