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Overpaying Employees: What You Can Do As An Employer

by David Polaski on Aug 17, 2021 5:06:20 AM

Accidentally overpaying employees is more common than you may think. Whether you’ve inadvertently overpaid an employee when hiring or promoting them or when they change their benefit elections, it happens. And it’s important to have a plan in place to avoid a hit to employee morale and noncompliance with any applicable federal and state laws.

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To help you prevent unauthorized overpayment of wages and ensure the accuracy of your payroll, in this article we’ll discuss:

  • What are common causes of overpayment?
  • Can employers take back overpaid wages?
  • What’s required to process overpayment collection?
  • How far back can an employer collect overpayment?
  • What can employers do to prevent payment errors?

After reading this, you’ll know how to handle overpayment of wages in your company to avoid negative consequences to your workplace. 

What are common causes of overpaying employees?

Overpaying employees can happen for a number of reasons. Some of the more common causes of overpaid employees  include:

  • Keystroke mistakes: In some cases, when entering payroll data, there can be a mistake that results in the overstatement of hours.
  • Time clock errors: Time clock errors can be caused when you add hours to an employee who has missing or inaccurate punches.
  • Bonus pay withholding discrepancies: When you pay an employee a bonus, they may want taxes withheld at a specific rate that’s different from their usual withholding and errors can arise when you don’t process the bonus accordingly.  
  • Wrong employees: Sometimes, you may pay an employee another worker’s hours in error.

Can employers take back wages from overpaid employees?

Both federal legislation like the Fair Labor Standards Act (FLSA) and state labor and employment laws give employers the right to recover an overpayment in full.

Before you initiate a recovery, you’ll want to check your state’s law to see if there are any limitations on when you can recover. For example, in New York, you can only deduct from an employee’s pay for the recovery of overpayments of wages when it’s due to a mathematical or clerical error.

In other states, like California, employee consent is required first or it is considered an unlawful deduction. Depending on how your direct deposit authorization form is worded, that may give the employee’s consent to a reversal.

What’s required to collect wages from overpaid employees?

It’s important to understand that you should follow specific steps in order to recover an overpayment. The FLSA has a recommended process but you should also check your state’s laws.

The following is a suggested process:

  1. Determine how much you overpaid the employee during the pay period.
  2. Contact the overpaid employee. Explain the situation as soon as you’re aware of the overpayment before taking any action to recover the funds. In some states, like Michigan, notifying the employee is a requirement. 
  3. Inform them you plan to deduct the overpayment out of their next paycheck or process a direct deposit reversal, which you have 5 business days to complete. If your employee is in a state where direct deposit reversals are restricted, such as California, the employee must either sign an approval for the reversal or they can pay you back manually with a personal check. Either way, ask your employee if a reversal will cause a financial burden (when an employee receives extra money – whether they notice it or not – they may spend it right away). If so, try to arrange installments that you both agree on and garnish the employee’s future wages over a period of time. The process you select should be agreed upon in writing by you and your employee.
  4. Provide any required documentation. In some places, like Washington, you’ll need to not only notify the employee but also provide documentation of the overpayment and terms of the adjustment.

Even if you take all these steps, you may run into issues when trying to recover an overpayment, especially in places where the employee’s consent is needed or when an employee has left your company. In these cases, or when an attempt is unsuccessful, you may seek legal action to recover the overpayment.

How far back can an employer collect overpayment?

You should initiate a recovery of overpaid wages as soon as you discover the mistake. In some cases, that may happen right away. Other times, you may not be aware of the issue for some time.

Fortunately, your state may give you a period of time to recoup the overpayment. In New York, for example, you can collect overpayments up to 8 weeks prior to notification to an employee that there was a problem and you have a maximum of 6 years to do so. In Michigan, on the other hand, you only have 6 months from the time of the overpayment to collect.

What can employers do to prevent overpaying employees ?

One of the best things you can do to help prevent overpaying employees is to total hours at the end of each pay period and review them for accuracy. If you’re using a time clock, you can print a summary report of hours worked, edited and missed punches.

Another proactive step you can take to help minimize these situations is to have a written policy that instructs employees to check their paystubs and immediately report any errors in payment. Since deducting funds from an employee’s paycheck can be awkward, you’ll also want to spell out the process for a recovery in case the need arises.

How to Run Accurate Payroll

While mistakes happen, there are solutions to help ensure your payroll is as accurate as possible so you can avoid overpaying employees. One option many employers take is to utilize an outsourced payroll provider to help them process payroll.

While a payroll vendor’s processing will only be as correct as the data you provide them, they can work with you on processes and the integration of other technologies like time and attendance platforms that will help you identify any errors early.

If you’re thinking about outsourcing payroll, Complete Payroll Solutions could be a good fit for you if you want:

  • Quick, easy access to a payroll system 24/7
  • Personalized customer service from the same payroll professional who can help ensure employees are always paid accurately and on time
  • The ability to generate and print pay statements from an online portal
  • Additional integrated options like time and attendance solutions under the same roof

If it sounds like Complete Payroll Solutions may be a fit for you, the next step is to read our article about our 4 payroll packages.


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