Legal Question in Business Law in California

It depends on the contract between you and the company you work for.

The question is really not one of "legality" versus "illegality." It is a question of permisible or impermissible (breaching) conduct of a party to a contract, and the answer requires careful contract interpretation. The only way to tell if withholding money from you under these circumstances is permissible or not is to review the terms of the contract under a high-power microscope and analyze what is seen in the light of centuries of decisions about the interpretation and enforcement of contracts. Given the facts you present, my hunch is that the company is off base and should not make these deductions, but I emphasize that the only way to know for sure is to go over the terms of your contract - hopefully in writing and otherwise legal (e.g., not an attempt to evade the workers' comp or withholding tax laws by classifying you as a contractor when you are actually properly considered an employee).