4 Key Steps to Recouping Wage Overpayments

Hand giving money. Vector Illustration.

An overpayment of wages can occur for many different reasons, such as inaccurate or delayed payroll processing, inaccurate accruals upon an employee’s termination, payroll system failure or simple clerical error. Regardless of why the overpayment occurred, the employee is not entitled to keep the extra cash, and the employer is legally entitled to recoup the amount in full.

Nevertheless, an employee may not be so quick to pay it back. After all, isn’t possession nine-tenths of the law? Actually, it’s not. But at the same time, an employer’s ham-handed attempts to collect money from employees can leave a bad taste in everyone’s mouth.

Recouping a wage overpayment requires an employer to strike a delicate balance between the right to repayment and the requirement to do it in a manner that complies with all laws, including the federal and state wage and hour laws, state wage payment laws and federal payroll tax laws that govern the recoupment process.

Taking the following four key steps will help an employer properly navigate the potentially painstaking recoupment process:

  1. Train supervisors and employees to spot overpayments;
  2. Work with employees to minimize any financial disruption;
  3. Create a paper trial to back up the demand for repayment; and
  4. Ensure the recoupment plan complies with applicable laws.

Step 1: Train Supervisors and Employees to Spot Overpayments

Identifying wage overpayments and quickly resolving them begins with employees. But while an employer can have a policy that holds employees responsible for spotting and reporting payroll errors, in practice this may not be so easy to enforce. That’s because employees usually stick their pay stubs in a drawer without checking them, if they save them at all, or those paid by direct deposit tend to only quickly glance at whether the payment shows up in their bank account.

To add some teeth to the basic policy, employers should train supervisors to encourage employees to actually check their pay stubs or direct deposits every pay day. The payroll department can help by educating employees on how to read a pay statement.

Employees should also be made aware that many overpayments are quite obvious. For example:

  • Too much money is in the paycheck or direct deposit;
  • Overtime was paid even though the employee did not work overtime hours; or
  • An unexpected bonus was received for which the employee does not qualify.

Employees should also be instructed to promptly alert their supervisors of such overpayments, and supervisors should be trained to notify the payroll department as soon as possible so the matter can be resolved quickly.

Other types of overpayments, however, will not be obvious to employees. A common example is when an employee is terminated with a negative balance in his or her paid time off account. In that type of scenario, the onus is on the payroll department to identify the overpayment and promptly inform the employee, his or her supervisor, as well as HR and corporate finance.

Step 2: Work With Employees to Minimize Any Financial Disruption

To make things easier for everyone involved, an employer may choose to let employees off the repayment hook for negligible amounts. A smart strategy is for an employer’s wage recoupment policy to specify the amount below which repayments will be excused. Otherwise, the cost to collect the overpayment may end up being more than it is worth.

By the same token, if the overpayment amount is not negligible, an employee who has already spent it or otherwise socked it away may not have a readily available pot of cash to dip into to pay it back in full or all at once. If the employee is fully cooperative, the employer should work with the employee to devise a workable repayment plan that will not burden the employee financially.

For example, the employer can withhold set amounts from the employee’s pay over an agreed number of pay days. In the best case scenario, the employee will prefer to bite the bullet in one shot and repay the employer in full with a single personal check.

Step 3: Create a Paper Trail to Back Up the Demand for Repayment

An employer generally does not need an employee’s permission to recoup a wage overpayment but it is expedient to have it. An employer that makes pay deductions to recoup an overpayment without the backup of a clear paper trail risks suffering the wrath of an uncooperative employee, the employee’s attorney and the state labor department, which may see the deductions as wage theft. So to play it safe, a demand for repayment and the agreed repayment plan should always be in writing and acknowledged by both the employee and the employer.

To create this paper trail, an employer should be prepared to send at least three certified letters to an overpaid employee:

Step 4: Ensure the Recoupment Plan Complies With Applicable Laws

Several different laws affect the wage repayment process. For example, the Fair Labor Standards Act (FLSA) allows an employer to recoup overpayments from nonexempt employees without prior permission, even if the deductions reduce the employees’ net pay to below the minimum wage. However, although the FLSA generally prohibits an employer from making deductions from an exempt employee’s guaranteed weekly salary, deductions may be made from other payments, such as a bonus.

Likewise, some state wage payment laws dictate whether deductions to recoup overpayments may be made at all, how long repayment plans may last, and whether an employer needs prior written permission from the employee.

In addition, a wage repayment must be handled carefully for payroll tax purposes, since it may impact both the employee’s and employer’s tax liability. The IRS has regulations regarding the payroll tax treatment of wage repayments that an employer must comply with. Those regulations require an employer to obtain an employee’s consent before claiming a refund from the IRS of the resulting overwithheld FICA (Social Security and Medicare) taxes.

What’s your biggest concern with seeking to recoup wage overpayments from employees? Let us know by sharing a comment below.

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