What to do when you overpay an employee?

Overpaid Employee

It can happen when someone accidentally misses a decimal point or adds an extra zero when entering their hours or when they submit payroll information and nobody catches it in time- you mistakenly overpay an employee.

 When that happens employers often wonder if there's a way to recoup the amount of over payment by deducting that amount from the employee's next check. While this is permitted under the federal Fair Labor Standards Act (FLSA) state regulations can differ.

Section 193, subdivision 1(c), of the New York State Labor Law permits an employer to make deductions from an employee’s wages for “an overpayment of wages where such overpayment is due to a mathematical or other clerical error by the employer.” There are some procedures that must be followed in order to make those deductions though. Before going through the following steps, an employer should do a review of the employee’s gross and net pay when looking to recover wages.

Timing- An employer can only go back to collect overpayments made in the 8 weeks prior to notifying the employee of the overpayment. An employer has up to 6 years to recover the payment, though in most cases the recovery time is much shorter than 6 years.

Method of recovery- An employer can make a deduction to the employee’s wages or by a separate transaction. For example, an employee could write a check to their employer for the amount of overpayment.

Limits on the recovery- As long as the entire overpayment is less than or equal to the net wages of the employee’s next payment, an employer may recover the overpayment on the employee’s next wage payment. If the entire overpayment is more than that amount, the employer should discuss a repayment schedule with the employee before the next wage payment.

Notice of intent- You must notify the employee at least three days before the next wage payment that you’re planning to recover the total amount overpayment during the next wage payment period. If you will be recovering the overpayment in other circumstances you must provide three weeks notification. This notice must include the amount of the overpayment, in total and per pay period, the total amount to be deducted per pay period and the dates of the deduction(s), and let the employee know that they may contest the recovery of the overpayment and the procedure for doing so.

Procedure – The employer must give the employee time to dispute/ask for a delay in the recovery of an overpayment.  The employer must provide the employee with a written response identifying the overpayments and provide the employee an opportunity to meet to discuss the issue. Finally, the employer must provide a written final determination.

Should an employee still dispute the recovery of the overpayment after the employer goes through the procedures above, the employer must not make the deductions to the wages until three weeks after the final determination.

HR ONE BEST PRACTICES RECOMMENDATIONS

IMG 1113

Whenever a situation arises where an overpayment appears to have been made to an employee, the best thing to do before taking any action with the employee directly is to confirm the details of an overpayment. If an employer wants to recover this amount they should be able to identify the clerical error that lead to the overpayment, the amount, and what steps were taken to prevent any further overpayment of wages.

Next, provide the employee with the notification of your intent to recover the amount of the overpayment. Including evidence of the overpayment in this notification may make the employee more amenable to accepting the recovery without disputing the deduction in the next pay period.

Sometimes an employee may not have an issue with their employer recovering the overpayment, but may feel that the timing of the recovery may impact their personal finances, cash flow, etc. While an employer may be able to reclaim the entire amount at once under the regulations, you may be better off working with the employee to come to terms on a mutually agreeable schedule of several future wage deductions to recover the amount. The agreed upon schedule should be documented and signed by the employee.

If your organization finds itself in this position, contact the HR Helpline at 1(800) 457-8829.

The full text of the regulations from the New York State Department of Labor are available online at: https://labor.ny.gov/legal/laws/pdf/wage-deduction/12-NYCRR195-Wage-Deductions-Text.pdf