Can a state withhold part of an employee's paycheck to collect a debt the employee owes the state?

Plain-English summary

In 1987, the executive director of the Department of Human Resources' Social Services Administration asked the Attorney General whether the State, as an employer, could withhold a State employee's paycheck to offset a debt the employee owed the State, and if so, what procedures had to be followed.

The Attorney General concluded that the State's set-off statute, then codified at SF §7-222, most likely applied broadly to any claim the State had against an employee, including a claim for wages or salary, not just the narrower category of erroneously paid tax refunds it originally covered in 1862. Even apart from the statute, the opinion found that the common-law right of set-off would independently justify the State withholding pay to recover money an employee had wrongly taken, such as through theft or embezzlement. But the opinion held that the Due Process Clause of the Fourteenth Amendment required the State to give the employee notice of a proposed deduction and a chance to respond before the set-off took effect, modeled on the informal pretermination procedure the Supreme Court approved for public employee discipline in Cleveland Board of Education v. Loudermill, and that existing State debt-collection regulations and the State personnel grievance process could satisfy that requirement without a full evidentiary hearing beforehand. Finally, the opinion concluded that the federal Fair Labor Standards Act limited how far the State could reduce an employee's pay: deductions generally could not push wages below the federal minimum wage, except where the debt itself arose from the employee's theft, misappropriation, or fraud, in which case the FLSA did not protect the employee from having the full amount recovered.

Currency note

This opinion was issued in 1987. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could Maryland dock a state employee's paycheck in 1987 to collect a debt the employee owed the state, without any warning first?
No, according to this opinion. The Attorney General concluded that due process required the State to give the employee notice of the proposed deduction and an opportunity to respond before instituting the offset, though a full evidentiary hearing was not required beforehand as long as a post-deduction grievance procedure was available.

Could a debt offset reduce a state employee's pay below minimum wage?
The opinion concluded that the federal Fair Labor Standards Act generally barred deductions that would push an employee's pay below the minimum wage, with one exception: if the debt arose from the employee's own theft, misappropriation, or fraud against the State, the FLSA did not prevent full recovery even below minimum wage, because the employee was not entitled to keep money that was never rightfully theirs.

Did the state set-off statute apply to unpaid wages, or only to things like erroneously paid tax refunds?
The statute's history was ambiguous on this point, but the opinion concluded that the set-off requirement, originally tied to tax refund claims in 1862, had become more generally applicable once the General Assembly moved the refund-specific provisions to a different part of the code in 1941 while leaving the set-off requirement in place, indicating lawmakers viewed the set-off rule as applying to all claims against the State, including claims for wages.

Background and statutory framework

SF §7-222 (then part of the State Finance and Procurement Article) barred the Comptroller from issuing a warrant to pay a person who owed $50 or more to the State, unless the person had a current payment agreement or the Board of Public Works granted a waiver. The opinion traced this requirement to Chapter 180 of the Laws of Maryland 1862, which originally addressed only claims for tax refunds, but found that a 1941 recodification, Chapter 701, moved the refund-specific rules elsewhere while leaving the general set-off requirement in place, an action the opinion treated as evidence that the General Assembly considered the set-off rule to apply to State claims generally, including claims to recover overpayments or losses from an employee's own wages.

Independent of the statute, the opinion found that the common-law doctrine of set-off, which lets parties who owe each other money net out their mutual debts, would justify the State recovering money an employee obtained through theft or embezzlement from their pay, citing the general unfairness of forcing an employer to pay wages to someone who has stolen from it.

On the constitutional side, the opinion applied the Supreme Court's three-part balancing test from Mathews v. Eldridge (the private interest at stake, the risk of erroneous deprivation, and the government's interest in efficient administration) and concluded that summary seizure of a State employee's wages, without any notice or hearing, would not satisfy due process. It found the case more analogous to Cleveland Board of Education v. Loudermill, involving discharge of a tenured public employee, than to the handful of Supreme Court cases allowing summary seizure for urgent public-safety reasons, such as misbranded drugs. Following Loudermill, the opinion concluded that an informal pretermination-style procedure, notice of the claim, an explanation of the evidence, and an opportunity to respond, followed by an available post-deprivation grievance hearing under Article 64A, would satisfy due process without requiring a full evidentiary hearing before the deduction began.

Finally, the opinion addressed the federal Fair Labor Standards Act, which the Supreme Court had recently held applies to state government employers in Garcia v. San Antonio Metropolitan Transit Authority. The opinion concluded the FLSA's minimum wage floor generally limits how much the State can deduct from an employee's pay to satisfy a debt, but that this protection does not extend to money the employee has already wrongfully taken from the State through theft, misappropriation, or fraud, since recovering money never rightfully owed to the employee does not reduce the employee's "wages" in the sense the FLSA protects.

Citations

Statutes:

• SF §7-222 (State Finance and Procurement Article set-off requirement)
• Chapter 180, Laws of Maryland 1862 (original claims-adjustment and set-off provision)
• Article 19, §§19 and 20 (later codification of the 1862 set-off provision)
• Chapter 701, Laws of Maryland 1941 (moved tax refund claims to Article 81, leaving the set-off requirement in place)
• §§14-904 and 14-905 of the Tax-Property Article (current codification of the tax refund provisions)
• Article 100, §94(d)(4) (Maryland Wage Payment and Collection Law, permissible wage deductions)
• Section 15-607 of the Commercial Law Article (authorizes garnishment of wages owed by governmental entities)
• Chapter 489, Laws of Maryland 1982 (enacted the wage garnishment authorization)
• U.S. Const. amend. XIV, §1 (Due Process Clause)
• COMAR 17.01.01.04B(1) (written demand for payment procedure for state debt collection)
• COMAR 17.01.01.04C (personal interview and telephone contact requirement for state debt collection)
• Article 64A, §52(b) (definition of "grievance" under the State personnel grievance procedure)
• Article 64A, §53 (employee's right to grieve an offset instituted by the employing agency)
• Article 64A, §54 (State personnel grievance and arbitration procedure)
• Article 64A, §54(b) (Secretary of Personnel's authority to award back pay)
• 29 U.S.C. §§201 through 219 (federal Fair Labor Standards Act)

Cases:

• Mass Transit Administration v. Household Finance Corporation, 292 Md. 313, 316-17 (1982)
• Vournas v. Montgomery County, 300 Md. 123, 129-30 (1984)
• Marshall v. Hendersonville Bowling Center, Inc., 483 F. Supp. 510, 516 (1980)
• City of Baltimore v. Comptroller, 292 Md. 293, 301 (1982)
• Fuentes v. Shevin, 407 U.S. 67, 80 (1972)
• Sniadach v. Family Finance Corp., 395 U.S. 337, 341 (1969)
• Fahey v. Mallonee, 332 U.S. 245 (1947)
• Parratt v. Taylor, 451 U.S. 527, 539 (1981)
• Mathews v. Eldridge, 424 U.S. 319, 335 (1976)
• Ewing v. Mytinger & Casselberry, Inc., 339 U.S. 594 (1950)
• Phillips v. Commissioner of Internal Revenue, 283 U.S. 589, 595 (1931)
• Cleveland Board of Education v. Loudermill, 470 U.S. 532, 543 (1985)
• Bell v. Burson, 402 U.S. 535, 539 (1971)
• Goldberg v. Kelly, 397 U.S. 254, 264 (1970)
• Comptroller of the Treasury v. Myers, 59 Md. App. 118 (1984)
• Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985)
• Mayhue's Super Liquor Stores, Inc. v. Hodgson, 464 F.2d 1196, 1198 (5th Cir. 1972)
• Brennan v. Heard, 491 F.2d 1, 4 n. 2 (5th Cir. 1974)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1987/Volume72_1987.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

PERSONNEL

Debt To State—Constitutional Law—Due Process—State May Make Deductions From Pay To Offset Debt But Must Provide Notice To Employee And Opportunity To Rebut Claim.

January 28, 1987

Mr. Frank Farrow, Executive Director
Department of Human Resources
Social Services Administration

You have requested our opinion on whether the State, as an employer, may withhold the paycheck of a State employee to offset a debt owed by the employee to the State. If such an offset is permissible, you further ask about the procedures to be followed in withholding a paycheck.

For the reasons given below, we conclude that the State may make deductions from a State employee's wages or salary to offset the employee's debt. However, the employee must be given prior notice of such a proposed deduction and an opportunity to rebut the State's claim. In addition, the amount that may be withheld from an employee is limited in some cases by the federal Fair Labor Standards Act.

I
State's Right to Set-Off

Various cases have arisen in which an employee of the State has become indebted to the State. For example, an employee may have obtained reimbursement for travel expenses in excess of the amount of expenses he or she actually incurred or may have destroyed or misappropriated State property. In each such case, the employee is liable to the State for reimbursement of money improperly received or for restitution of the value of the property.

Section 7-222 of the State Finance and Procurement Article ("SF" Article) provides:

"Unless a person and the Comptroller or any duly authorized agent or representative designated by the Comptroller have entered into an agreement for the payment of the person's indebtedness to the State and the payments are current or unless, for good cause shown, the Board of Public Works grants a waiver, the Comptroller, the Chief Deputy Comptroller, or a deputy comptroller may not issue to a person a warrant for payment of a claim due to the person in the person's own right, if the person owes $50 or more to the State, a unit of the State government, or any governmental entity under the control of the State."

The language of SF §7-222 does not clearly limit the types of claims to which it applies. And, an employee's right to be paid for the work he or she has performed is unquestionably a claim against the State due to the employee in his or her own right. See Mass Transit Administration v. Household Finance Corporation, 292 Md. 313, 316-17 (1982). Thus, SF §7-222 on its face appears to be applicable to State employees' claims to wages or salary.

That conclusion is, nonetheless, not entirely clear. The provision for set-offs against claims against the State was originally enacted by Chapter 180 of the Laws of Maryland 1862, which "relat[ed] to the adjustment of claims against the State." That Act established a procedure for making claims "for errors in the payment of [the claimant's] State taxes, or for sums erroneously paid into the Treasury . . . ." In addition, the Act required the Comptroller to deduct amounts due to the State before issuing a warrant for payment of claims against the State.1 It thus appears that, as originally enacted, the statutory set-off requirement may have been intended to apply only to the particular kind of claims against the State addressed in Chapter 180, claims for refund of amounts the claimant had erroneously paid to the State.

However, Chapter 701 of the Laws of Maryland 1941 repealed the provisions for claiming refunds that had been enacted by Chapter 180, substituting provisions in Article 81 that relate specifically to refunds of erroneously paid taxes.2 Nonetheless, the 1941 enactment left then Article 19, §19, requiring set-offs, in place.3 Such an action taken after the enactment of a statute may furnish guidance as to the statute's intended scope. Vournas v. Montgomery County, 300 Md. 123, 129-30 (1984).

In our view, the separation of the set-off requirement from the provisions for claiming refunds indicates that the General Assembly viewed the set-off requirement as being more generally applicable than the refund provisions. That is, the General Assembly thereby indicated that the set-off applies to all claims against the State, whatever their nature. Accordingly, we think that SF §7-222 requires that a State employee's claim to salary or wages, like any other claim against the State, be offset by any debt that the employee owes to the State.

Even were that not so, the general creditor's right of setoff would justify withholding the employee's pay in these cases. Set-off is the right of parties indebted to each other "to set off their respective debts by way of mutual deduction . . . ." 80 C.J.S. Set-off and Counterclaim §3 (1953). "The right of set-off is based on principles of right, justice, and benevolence. The doctrine is remedial in character, and is a mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity, and good conscience ought to pay it." Id. The doctrine applies to an employer whose employee has improperly obtained excessive payments or has destroyed property of the employer. Indeed, one federal court has commented that "[t]o require an employer to pay wages due an employee who is indebted to the employer for an outright theft or embezzlement would be a perversion of justice . . . ." Marshall v. Hendersonville Bowling Center, Inc., 483 F. Supp. 510, 516 (1980).4

Hence, we think that the State does have the right to make deductions from a State employee's pay to offset the employee's indebtedness to the State.5 At the same time, there are restrictions on the exercise of that right.

II
Due Process Requirements

A. Notice and Hearing

The Due Process Clause of the Fourteenth Amendment requires a State to give notice and an opportunity for some kind of hearing before it may finally deprive a person of property. Fuentes v. Shevin, 407 U.S. 67, 80 (1972).6 The wages or salary due to an employee is, of course, property of the employee. Sniadach v. Family Finance Corp., 395 U.S. 337, 341 (1969).

To be sure, the Due Process Clause does not necessarily prohibit summary seizure of property without notice or an opportunity for a prior hearing. E.g., Fahey v. Mallonee, 332 U.S. 245 (1947). But cases approving summary seizure are exceptional:

"These cases recognize that either the necessity of quick action by the State or the impracticality of providing any meaningful predeprivation process, when coupled with the availability of some meaningful means by which to assess the propriety of the State's action at sometime after the initial taking, can satisfy the requirements of procedural due process." Parratt v. Taylor, 451 U.S. 527, 539 (1981).

We do not think that a case in which the State seeks to recover money or property from a State employee presents such a situation. In determining whether a predeprivation hearing is required, the Supreme Court has considered (i) the private interest at stake, (ii) the risk of an erroneous deprivation of that interest, and (iii) the governmental or public interest to be served, including the government's interest in avoiding undue fiscal and administrative burdens. Mathews v. Eldridge, 424 U.S. 319, 335 (1976). Only where the public interest is extremely strong, as, for example, in a case involving misbranded drugs, has it been held to outweigh the risk of erroneous deprivation of an important private interest so as to justify summary seizure of property. See Ewing v. Mytinger & Casselberry, Inc., 339 U.S. 594 (1950).

The State's interest in the expeditious recovery of debts owed to it, with a minimum of administrative burdens, is undeniable. See Phillips v. Commissioner of Internal Revenue, 283 U.S. 589, 595 (1931). Nonetheless, we do not think that interest is of the same quality as the imminent threat to the public health, safety, or welfare involved in such cases as Ewing. Hence, in our view, the State's interest in protecting the public fisc is not so overriding, when balanced against the other considerations, as to justify summary seizure of a State employee's wages or salary.

The Supreme Court has repeatedly acknowledged the strength of the private interest at stake when government actions affect an individual's livelihood. E.g., Cleveland Board of Education v. Loudermill, 470 U.S. 532, 543 (1985); Bell v. Burson, 402 U.S. 535, 539 (1971); Goldberg v. Kelly, 397 U.S. 254, 264 (1970); Sniadach, 395 U.S. at 340. The drain on a family's income resulting from the State's seizure of some or all of a wage-earner's paycheck cannot be gainsaid.

Moreover, cases in which it is claimed that a State employee is indebted to the State are likely to involve factual disputes. Consequently, "some opportunity for the employee to present his side of the case is recurringly of obvious value in reaching an accurate decision." Loudermill, 470 U.S. at 543.7 Hence, we think that the Due Process Clause requires the State to give an employee notice and an opportunity to be heard before it may institute a set-off against the employee's pay. Cf. Sniadach, 395 U.S. at 342 (prejudgment garnishment of wages, without notice and hearing, violates due process).

B. Nature of Hearing

This is not to say, however, that the required hearing need be elaborate. In Loudermill, the Supreme Court considered the nature of the hearing that must be afforded to tenured public employees before they may be discharged. Notwithstanding the strong interest of those employees in retaining their employment, the Court concluded that "the pretermination hearing need not definitively resolve the propriety of the discharge. It should be an initial check against mistaken decisions, essentially, a determination of whether there are reasonable grounds to believe that the charges against the employee are true and support the proposed action." 470 U.S. at 545-46. The Court held, therefore, that an employee need not be afforded a full evidentiary hearing before the termination: "The tenured public employee is entitled to oral or written notice of the charges against him, an explanation of the employer's evidence, and an opportunity to present his side of the story." 470 U.S. at 546.

We think that the holding in Loudermill is equally applicable to set-offs against State employees' paychecks. While there is no denying the significance of even a temporary deprivation or reduction in pay, we think that such a deprivation is somewhat less severe than the termination of employment. Therefore, we think that an employee who is apparently indebted to the State is entitled to notice of a proposed deduction from his or her pay, an explanation of the evidence on which the allegation of indebtedness is based, and an "opportunity to present reasons, either in person or in writing, why the proposed action should not be taken . . . ." Id.

We note that the regulations of the Department of Budget and Fiscal Planning that govern the collection of debts owed to the State require that written demand for payment be made, "inform[ing] the debtor of the amount and reason for the indebtedness and the date when payment is due." COMAR 17.01.01.04B(1). Those regulations also require creditor agencies to "undertake personal interviews and telephone contact with their debtors . . . ." COMAR 17.01.01.04C. We think these existing procedures for the collection of debts in general could be adapted to provide at least the minimum process due in cases in which the debtor is a State employee. That is, the demand for payment should inform the employee of the agency's intention to set off the employee's debt against his or her pay. The demand for payment should also advise the employee of his or her right to present reasons why the proposed set-off should not be instituted.8 If the employee does offer such reasons, he or she should be informed in writing of the agency's determination of the matter.9

Article 64A, §54 establishes a grievance procedure, culminating in arbitration or an evidentiary hearing, that is available to State employees whose employment status or conditions of employment are adversely affected by agency actions. In any case in which the disputed claim is one owed to the employee's employing agency, the employee has a clear statutory right to complain of the institution of an offset in such a proceeding. Article 64A, §53. A claim against the employee by another agency is not clearly a "grievance" as that term is defined in Article 64A, §52(b). See 64 Opinions of the Attorney General 146, 148 (1979). However, due process requires that similar hearing procedures be afforded the employee in such a case, and, as a practical matter, the grievance procedure is used for resolution of all employment-related disputes.

If the final decision of the Secretary of Personnel in that proceeding is favorable to the employee, the Secretary is expressly empowered to grant the employee back pay. Article 64A, §54(b). Further, the final decision of the Secretary is subject to judicial review. Comptroller of the Treasury v. Myers, 59 Md. App. 118 (1984).

In our opinion, this procedure by which an employee may obtain an evidentiary hearing after the institution of a set-off, if coupled with predeprivation notice and an opportunity to respond, meets the requirements of due process. This procedure is no less formal than that approved by the Supreme Court in Loudermill for cases of employment termination. 470 U.S. at 547.10

III
Fair Labor Standards Act Requirements

The federal Fair Labor Standards Act (the "FLSA"), 29 U.S.C. §§201 through 219, establishes minimum wage requirements for most employees. In Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), the Supreme Court held that the FLSA applies to states, as well as to private employers. Accordingly, the State may not, by offsetting an indebted State employee's pay, reduce the employee's wages below the minimum wage in contravention of the FLSA.

Nonetheless, the FLSA does not prevent the State from offsetting against a State employee's pay amounts previously misappropriated by the employee. In such a case, a temporary reduction in the employee's wages to a level below the minimum wage does not conflict with the FLSA:

"As a matter of law the employee would owe such amounts to the employer, and as a matter of fact, the repayment of moneys taken in excess of the money paid to the employee in wages would not reduce the amount of his wages . . . In such a case there would be no violation of the [FLSA] because the employee has taken more than the amount of his wage and the return could in no way reduce his wage below the minimum." Mayhue's Super Liquor Stores, Inc. v. Hodgson, 464 F.2d 1196, 1198 (5th Cir. 1972).

Accord Brennan v. Heard, 491 F.2d 1, 4 n. 2 (5th Cir. 1974). Thus, the FLSA does not limit the State's right to set off against an employee's pay the value of money, paid leave, or property obtained by the employee through theft, misappropriation, or fraud.

However, if a State employee is indebted to the State for any other reason, the FLSA does limit the amount of any set-off against that employee's pay. By enacting the FLSA, "Congress has determined that the individual worker should have the freedom and responsibility to allocate his minimum wage among competing economic and personal interests. . . . The FLSA decrees a minimum unconditional payment and the commands of that Act are not to be vitiated by an employer . . . ." Brennan, 491 F.2d at 4. Accordingly, in any case in which an employee's indebtedness is not the result of the employee's having previously obtained an actual or effective overpayment of wages through misconduct, deductions from the employee's pay to offset the indebtedness must be limited to amounts that will not reduce the employee's pay below the minimum prescribed by the FLSA. Even the employee's consent to larger deductions in such a case is not effective to waive the employee's right to receive the minimum wage. Mayhue's Super Liquor Stores, 464 F.2d at 1197.

V
Conclusion

In summary, it is our opinion that the State may make deductions from a State employee's pay to offset a debt that the employee owes to the State. However, the employee must be given prior notice of such a proposed withholding and an opportunity to rebut the State's claim against the employee. In addition, the FLSA prohibits deductions that would reduce the employee's wages below the minimum wage unless the employee's indebtedness arises out of his or her theft, misappropriation, or fraud against the State.

J. Joseph Curran, Jr., Attorney General
C.J. Messerschmidt, Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

1 The provisions of that Act were subsequently codified at Article 19, §§19 and 20.

2 Substantially the same provisions are now codified at §§14-904 and 14-905 of the Tax-Property Article.

3 Present SF §7-222 is a recodification, with subsequent amendment, of the former Article 19 set-off requirement.

4 The General Assembly, while acting to protect employees from unjustified wage deductions, has nonetheless recognized that employers' offsets against wages may be appropriate. The Maryland Wage Payment and Collection Law prohibits nonconsensual deductions except pursuant to law, regulation, or court order or those that "[a]re allowed by the Commissioner [of Labor and Industry] because the employee has received full consideration for the deductions." Article 100, §94(d)(4).

5 Our view in this regard is bolstered by the General Assembly's abrogation of the common law rule that public employees' wages are not subject to garnishment by third party creditors. See City of Baltimore v. Comptroller, 292 Md. 293, 301 (1982); Mass Transit Administration v. Household Finance Corp., 292 Md. 313, 314 (1982). Section 15-607 of the Commercial Law Article, enacted by Chapter 489 of the Laws of Maryland of 1982, authorizes garnishment of wages due from governmental entities in the same manner and to the same extent as wages due from private employers. The General Assembly thus has clearly expressed its intent that public employees' liability for their debts be fully enforceable.

6 The Due Process Clause provides that "[n]o State shall . . . deprive any person of life, liberty or property, without due process of law. . . ." U.S. Const. amend. XIV, §1.

7 The Supreme Court further noted in Loudermill that, in similar cases, a governmental employer also has an interest in accurate decisionmaking, to avoid "taking the possibly erroneous and counter-productive step of forcing its employees onto the welfare rolls." 470 U.S. at 544.

8 In this regard, we note particularly that SF §7-222 excepts from the set-off requirement those cases in which the debtor and the Comptroller or an authorized agent or representative of the Comptroller have entered into an agreement for the payment of the indebtedness.

9 In some cases, the State's claim is one against an employee who has resigned or been discharged and who, consequently, is due only one or two additional paychecks when the claim arises. If at all practicable, the mandated pre-deprivation hearing in such a case should occur before the date on which the employee would regularly receive the paycheck from which the offset will be deducted. Any necessary delay in the employee's receipt of the paycheck pending the employee's response to notice of the offset must be kept to a minimum.

10 In 70 Opinions of the Attorney General 151, 157 (1985), we concluded that the existing procedures for the discharge of classified State employees, which include a pretermination evidentiary hearing, "clearly meet the due process requirements enunciated in Loudermill." We also recognized, however, that the decision in Loudermill does not require a formal pretermination hearing. By the same token, the State certainly could make a full evidentiary hearing available to an employee indebted to the State before instituting any deduction from wages or salary to offset the employee's indebtedness to the State. Such a procedure may, indeed, be preferable. Nonetheless, we think that the due process principles enunciated in Loudermill do not require such a formal predeprivation hearing.