Can I deduct an overpayment from an employee’s paycheck?

Quick answer: Maybe. Employers can often recover accidental payroll overpayments, but the rules for doing so vary significantly by state. Before deducting an overpayment from an employee’s paycheck, determine whether state law allows the deduction, whether notice or written authorization is required, how much may be deducted at one time, and whether there is a deadline for recovering the overpayment. Don’t automatically take the full amount from the employee’s next paycheck.

Question: While auditing our books, we realized that one of our employees has been overpaid on every paycheck since March. Their pay rate was entered incorrectly into our payroll system, and they have been receiving an extra $2.00 per hour. The employee never brought this to our attention, which is quite upsetting. I’d like to recoup the money in increments. Can I set up an automatic deduction from their paycheck until it’s paid off?

Can Employers Recover Accidentally Overpaid Wages?

The legal side: There is no one straight answer for how to handle this, so it is critical that your unique situation is reviewed against state and federal law. Making deductions from an employee’s pay is highly restricted, and there are not many situations where it is allowed. While recouping a mistaken overpayment seems like it should be the type of payroll deduction that should be allowed, there can still be complicated rules for employers to follow. 

Some states only allow you to make payroll deductions for overpayments if you do so within a certain amount of time. If you took too long to notice the error, you are going to have a harder time trying to get that money back. 

Most states have restrictions on how much can be deducted from a paycheck. A basic rule of thumb is that you can’t reduce someone’s take-home pay to below minimum wage. But many states limit deductions to certain amounts or percentages. 

Before recovering an overpayment through payroll, determine what notice and authorization requirements apply. Some states require advance written notice, employee authorization, specific repayment terms, or other procedures before an employer may deduct an overpayment from wages.

Correcting the payroll rate going forward and recovering past overpayments are two separate issues. Once you confirm that the employee’s documented rate was entered incorrectly, you can correct the payroll system so future wages are calculated using the proper rate. Recovering money that has already been paid requires a separate analysis of the wage-deduction laws that apply where the employee works.

How Should You Tell an Employee They Were Overpaid?

The human side: We understand why you’re frustrated that the employee never said anything, but you should also recognize the corresponding error made by the practice in applying the incorrect rate of pay. You do not know that the employee recognized the mistake and deliberately kept quiet.

Start with the error, not an accusation.

“We discovered during a payroll audit that your hourly rate was entered incorrectly in our system beginning in March. You were paid $2.00 more per hour than your documented rate. We are correcting the rate going forward, and we also need to discuss the amount that was overpaid and how repayment will be handled.”

Show them the calculation and give them an opportunity to review it. If the law allows you flexibility in how repayment occurs, an incremental plan may be much easier for the employee to manage than trying to recover a large amount at once.

Take some additional steps to review your payroll process to prevent similar errors from happening in the future. Payroll reports should be reviewed by an owner or manager prior to payroll being finalized, to ensure that details like this are caught ahead of time. 

Frequently Asked Questions (FAQs):

Can I take the entire overpayment out of the employee’s next paycheck?

Probably not. States can limit the amount you may deduct, require advance notice or authorization, or impose other procedures for recovering wage overpayments.

Do I have to let the employee keep money we accidentally overpaid?

Not necessarily. An actual payroll overpayment can often be recovered. The important questions are whether the higher amount was truly paid in error and what recovery methods your state allows.

Can I discipline the employee for not reporting the higher pay rate?

Don’t assume the employee knowingly concealed the mistake. Talk with them first. If you uncover evidence that they recognized the error and intentionally took advantage of it, that may create a separate conduct issue to evaluate.

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