February 09, 2022
Author: Lorman Education
Although infrequent, there are times when an employer makes an overpayment to an employee. This is obviously concerning and can become a headache depending on the severity of the error.
How Do Overpayments Happen?
Some common reasons for overpayments include accounting errors, rate discrepancies, incorrect benefit deductions, sales commission errors, and complications from terminated employees.
What Happens Now?
Regardless of how it happens, overpayment always means the employee is responsible for repaying the money when it is demanded. An error is not an automatic entitlement to keep unearned money.
However, before employers can request that employees repay the money, they must understand how federal and state laws differ. Attempting to deduct money from an employee’s earned pay requires doing so without negative legal repercussions.
According to the Fair Labor Standards Act, employers are not required to obtain written authorization from employees prior to deducting overpayments. State laws, which may vary, usually require obtaining a voluntary consent form and written authorization before employers can make pay deductions.
How State Laws Vary
Differences among state laws typically include whether deductions to recover wage overpayments are permissible, when deductions can occur, and the acceptable amount of money to recover per pay period. The principle state of employment determines which state law applies. Therefore, if an employee works in New York but lives in New Jersey, New York state law would apply regarding payroll overpayment recovery.
For some state laws, payroll administrators do not need employee consent, but a two week advance notice of when deductions will begin is required. Furthermore, major overpayments cannot be deducted from one paycheck. Rather, employers must make deduction on a per paycheck basis that should not exceed a capped amount.
In Maine, for example, an employer cannot withhold more than 10 percent in subsequent paychecks when the total overpayment is less than 15 percent. At the same time, it is acceptable to demand full repayment if the amount exceeds 15 percent and the employee knowingly accepted the additional money.
Other states like Washington and Oregon require that employers reach an agreement with an employee before making future paycheck deductions. Washington state law allows employees to consent to a paycheck deduction or repay their employer out of personal funds.
Other Considerations
Employers must abide by federal and state wage laws and cannot simply deduct money from an employee’s paycheck. In some cases, this could result in an hourly rate that is less than the minimum wage. Exempt employees present another set of rules to follow.
Employees who are not receptive to repaying the money leaves employers with different prospects based on whether they are exempt or nonexempt. Exempt employees are guaranteed a salary without deductions under FLSA who have put in hours during a workweek. Employers should always get written consent from exempt employees before attempting to recover overpayments.
If an employee fails to honor a repayment within 30 days of the request, employers have a right to charge interest. Ultimately, a payroll overpayment could prove more costly to the employee than the employer.
For more information
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