Should I Fire My Employee For Making a Big Mistake?
One of the most common (and frustrating) situations for California employers is when an employee makes a costly mistake, and the business has no legal way to recover the loss. Many employers assume they can deduct the cost or require repayment. California law does not allow that.
John Fagerholm, Managing Partner at DefendMyBiz, explains why and what your actual options are.
The Scenario: Costly Employee Mistake
"I had a call from a client. Basically, one of their employees made a horrific, negligent mistake that cost the company a lot of money."
The employer's instinct was reasonable enough: don't fire the employee, but make them financially accountable. "What he wanted to do was deduct the cost of the equipment that was ruined from the employee's paycheck, or have some sort of agreement with the employee to pay back the company. This is because the mistake was significant and involved expensive equipment."
From a business perspective, this can feel reasonable. The employee broke something expensive through their own negligence. Why shouldn't they cover it?
Because California law doesn't see it that way.
Can Employers Recover Losses from Employee Mistakes?
No. California law prohibits employers from deducting wages to cover employee mistakes, negligence, or business losses, even if the employee agrees.
John explains the legal position clearly. "There's nothing in the law that requires the employee to be the insurer of mistakes that the employee makes."
Under the California Labor Code, employers cannot deduct from an employee's wages to cover the cost of mistakes, damaged equipment, or business losses caused by the employee, even if the employee agrees to it. Employees are not legally responsible for covering business losses caused by on-the-job mistakes.
"It was very difficult to convince this client that the only remedy is whatever discipline he was going to impose, whether that was termination or whatever else, whatever the thousand other types of discipline you can impose."
Employers can apply disciplinary action, but wage deductions are not permitted.
Case Example: A $90,000 Employer Loss
To get the point across, John told his client a story from his own experience, one that cost him personally.
"When I first started doing well enough to hire, I hired someone who was even more experienced than me. He was just a better litigator at that time anyway. And so he made a mistake, a really big mistake, that cost me about $90,000."
John's first instinct was the same as his client's: start deducting it from the check. "At the time I was doing more commercial litigation, I wasn't so involved in labor and didn't understand that that was a big no-no."
He looked into it. The employee even agreed to the arrangement. But it didn't matter.
"As I looked into it, I realized that it wasn't something that I could do anyway. Ultimately, he had to absorb the $90,000 loss. He's the employee. I'm the employer. And it was painful."
The employee was good enough that John kept him and absorbed the loss. But the legal reality was non-negotiable. The financial loss remains with the employer.
What Employers Can Do Instead
John is clear about where the line sits:
"As an employer in California, if an employee costs you money by making some mistake, whatever that mistake is, whether big or small, your only remedies are standard disciplinary actions available for employee misconduct or performance issues."
That means you can counsel the employee, issue a written warning, suspend them, demote them, or terminate them. What you cannot do is recover the financial loss from their wages or require repayment through a payroll deduction agreement.
The one exception John notes: "Of course, if it's criminal, then besides terminating them, you can press charges or pursue appropriate legal action." If the conduct rises to the level of criminal activity (such as theft or fraud), different legal remedies may apply. But negligence, even expensive negligence, doesn't rise to that level.
For employers navigating termination decisions after a costly employee mistake, understanding the at-will doctrine and proper documentation practices matters, particularly if the termination could later be challenged. The wage-and-hour defense team at DefendMyBiz, along with our hybrid claims defense practice, can help you think through the right approach.
Watch John's full breakdown below:
Don't Let the Response to a Mistake Create a Bigger Problem
California law does not allow employers to recover financial losses from employee mistakes through wage deductions. Employers must rely on disciplinary action unless the conduct involves criminal wrongdoing.
How you respond to an employee mistake matters as much as the mistake itself.
If you're dealing with an employee situation that involves significant financial harm to your business, schedule a free 15-minute consultation with DefendMyBiz. We represent employers only and can help you figure out the right path forward.
FAQs
Can I deduct the cost of damaged equipment or a costly mistake from an employee's paycheck?
What if the employee agrees in writing to repay the company for the damage they caused?
What can I actually do when an employee makes a costly mistake?
Can I fire an employee for making an expensive mistake?
What if the mistake was so severe that it looks more like intentional misconduct?
Disclaimer: The above content is for informational purposes only. This is not legal or tax advice. Laws, IRS guidance, and withholding requirements can change, and outcomes depend on specific facts. You are advised to contact a qualified attorney for any legal advice.
