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Does Your Company Give Employees Personal Loans? Be Sure To Have Legal Wage Deduction Agreements!!

In Illinois, deductions from paychecks must be done very carefully. Illinois employers need to be aware of the tricky web of laws and regulations which often prevent the employer from simply deducting, unilaterally, from the employee’s paycheck-even when the employer is merely paying the Company back for a loan taken out by the employee.

An employee’s paycheck is sacred under the law. Once an employer earns his/her pay, it is protected legally. Employers must treat it accordingly.

If an employer makes a “cash advance” to an employee in Illinois, there are strict rules under the law about how the employer can pay itself back.

WRITTEN AGREEMENT REQUIRED: If a cash advance by an employee is to be repaid to the employer through payroll deductions, both the employer and the employee must sign and date an agreement specifying the exact amount of the advance, the detailed repayment schedule, and the specific method of repayment.

During the course of employment, no cash advance repayment agreement in Illinois can provide a repayment schedule of more than 15% of an employee’s wages per paycheck.

DEDUCTION FROM FINAL PAYCHECK: However, if upon termination, an employee owes an amount greater than 15% of gross wages, that amount may be withheld from the employee’s final compensation, but only if such arrangement was included in the agreement signed and dated when the cash advance was made.

So…when drafting a cash advance repayment agreement, be sure to include that if the employee quits or is terminated, and the cash advance is still not repaid in full by the time of separation from employment, then the Company can deduct all of the funds it is owed out of the final paycheck even if that amount exceeds 15% of the gross wages of the employee.

Surprising to many Illinois employers is that if the cash advance repayment agreement doesn’t state that the Company can take more than 15% of the gross out of the final paycheck, then it is illegal to do so. It is a violation of the Wage Payment and Collection Act to do so.

The repayment agreement may be signed and dated at the time of the deduction made by the employer or at the time the advance was given to the employee by the employer.

WRITTEN AUTHORIZATION GIVEN FREELY AT THE TIME THE DEDUCTION IS MADE: With limited exceptions for items such as payroll tax withholding and wage garnishment orders, an Illinois employer generally may not make deductions from an employee’s wages or final compensation without first obtaining the employee’s written authorization “given freely at the time the deduction is made.”

Employers were previously required to obtain the employee’s express written consent prior to each deduction even when the deductions were to recur over a series of pay periods.

NEW RULE CLARIFYING “GIVEN FREELY AT THE TIME THE DEDUCTION IS MADE”: Helpful to Illinois employers, a later new rule under the Illinois Wage Payment & Collection Act explains that if the written agreement sets out the period of time over which the deductions can be made from the employee’s paycheck, and there is the same amount of the deduction for each pay period, then this would be considered to be “given freely at the time the deduction is made.”

Specifically, the new rule [Section 300.720 of the Administrative Rules for the Illinois Wage Payment & Collection Act] states:

a) Any written agreement between employer and claimant permitting or authorizing deductions from wages or final compensation must be given freely at the time the deduction is made. In the case of cash advances, the agreement may be made either at the time of the deduction or at the time of the advance itself.

b) When a deduction is to continue over a period of time and the written agreement provides for that period of time, provides for the same amount of deduction each period and allows for voluntary withdrawal for the deduction, the agreement shall be considered to be given freely at the time the deduction is made.

Note the key points…when obtaining advance authorizations for recurring wage deductions, Illinois employers must carefully include the following details in their written agreements with employees:

  1. the period of time during which deductions will be made;
  2. a deduction in the same amount each period; and
  3. a statement indicating that the employee may voluntarily withdraw his or her authorization for the deduction.

ADVANCED VACATION PAY: When companies advance vacation pay, these same basic principles apply to written repayment agreements. Under the Rules to the Illinois Wage Payment & Collection Act, if an employer permits an employee to take a vacation that has not yet been earned, and the employee resigns or is terminated, the employer may not deduct the unearned vacation pay from the employee’s wages or final compensation without a valid signed and dated written agreement. Again, be sure that such a written agreement does not provide for deductions of more than 15% of the employee’s gross wages per paycheck and that the employer reserves the right to repay itself in full (even if a deduction of more than 15% of gross is needed from the final paycheck in order for the employer to be paid back).

As an employment lawyer assisting company management, I see many payroll deduction agreements from clients (often when the client is attempting to enforce such an agreement before the Illinois Department of Labor). By following a few simple rules as laid out by Illinois law, the employer can be in a strong legal position to pay themselves back under these written agreements. However, if these rules are not followed precisely, the employer may find to its dismay that the agreement is unenforceable under Illinois law.

Warning! A deduction should not bring an employee’s paycheck to a point where it violates minimum wage. No deduction can take place if the deduction would allow an employee’s actual received wages to be less than the minimum wage for a particular pay period.

For assistance with evaluating or drafting a valid wage deduction agreement, contact Attorney Nancy E. Joerg who can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at

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