Over the years, Massachusetts employers have wondered: “What can I deduct from an employee’s paycheck?”

The Supreme Judicial Court, deferring to the attorney general’s interpretation of the Massachusetts Wage Act, recently narrowed the list of potential deductions with its ruling in Camara v. Attorney General.

ABC Disposal Service had a policy of allowing workers found by ABC to be at fault in accidents involving company trucks to agree to a deduction from their earned wages in lieu of discipline.

Between 2003 and 2006, ABC’s costs attributable to damage done to vehicles and personal property went down by 78 percent. The company said the reduction was due to implementation of its policy.

The Attorney General’s Office found that the policy violated the “valid set-off” language in the Massachusetts Wage Act and conducted an audit of the deductions made by ABC over a two-year period.

The audit found that ABC had deducted $21,487.96 from the wages of 27 employees (who chose to reimburse the company between $15 and $30 a week). The AG required ABC to make restitution and, in addition, assessed a civil penalty of $9,140.

Following timely appeals, the SJC took the case up on direct appellate review.

Section 148 of the Massachusetts Wage Act requires prompt payment of wages due. It also provides “no person shall by a special contract exempt himself” from paying wages due. G.L.c. 149, §148 (emphasis added).

Section 150 of the Wage Act limits employer defenses to paying wages on time:

“[N]o defense for failure to pay as required, other than … a valid setoff against the same … shall be valid.” G.L.c. 149, §150 (emphasis added).

The attorney general’s position was that “the special contract” language in Section 148 prohibited an employer from deducting or withholding payment of any earned wages.

“In her view regardless of an employee’s agreement, there can be no deduction of wages unless the employer can demonstrate … the existence of a valid attachment, assignment or setoff as described in Section 150, a condition she claims that the ABC set-off policy does not meet,” the SJC wrote.

The court added that, according to the AG, valid setoffs enumerated in Section 150 “all implicitly involve some form of due process through the court system, or occur at an employee’s direction and in the employee’s interests. ABC’s deductions therefore do not qualify: ABC has not shown that any of the employees are legally liable for damages, or that, with respect to third parties, ABC was legally required to make payments on an employee’s behalf by a judgment that ‘could not have been avoided.’”

The employer argued that recouping costs from an employee who caused damage in an accident in which the employee was at fault was analogous to a setoff to correct an employee’s misappropriation of an employer’s funds.

ABC further contended that it performed thorough investigations and made findings of fault before entering into set-off agreements with employees, and as such “its debts were clear and established.”

The SJC did not agree, finding:

“An arrangement where ABC serves as the sole arbiter, making unilateral assessment of liability as well as amount of damages with no role for an independent decision maker, much less a court, and apparently, not even an opportunity for an employee to challenge the result within the company, does not amount to ‘a clear and established debt owed to the employer by the employee.’”

In a very interesting and provocative footnote, the SJC addressed the outer contours of the term “valid setoff”:

“The Attorney General offers the following as examples of the defenses available to employers under the category of ‘valid setoff’: where there is proof of an undisputed loan or wage advance from the employer to the employee; a theft of the employer’s property by the employee as established in an ‘independent and unbiased proceeding’ with due process protections for the employee; or where the employer has obtained a judgment against the employee for the value of the employer’s property.

“We do not understand the Attorney General to be arguing that these are the only types of setoffs that are permissible under Section 150; if that is her point we do not agree with it. There well may be other circumstances — for example as part of a collective bargaining agreement — in which an employer and employee enter into a set-off arrangement that does not involve formal judicial or administrative proceedings but that would be valid because it can be shown that the parties have voluntarily agreed to a set of appropriately independent procedures for determining, in a manner that adequately protects the employee’s interests, both the existence and amount of the debt or obligation owed by the employee to the employer.”

Employers should scrutinize their deductions from employees’ wages to see if they meet the SJC tests set out above.

Jeffrey M. Rosin and Ellen C. Kearns are the founding partners of the Boston office of Constangy, Brooks & Smith.