Overpaid an Employee? Here's What To Do

Accidents happen, even in payroll. Keeping accurate payroll records and paying every employee for their working hours is an essential part of doing business.  The last thing you want is to accidentally underpay an employee. But what happens if a mistake goes in the other direction? How do you deal with a situation where you have overpaid an employee, instead?

You will need to carefully navigate the legal and diplomatic solution to make your payroll and balance sheets right again. This article will help you plan the necessary steps to reclaim the overpayment without accidentally breaking the law or offending your valued employee.

Reasons You May Accidentally Overpay Employees

Overpayment is something that can occur for a few common reasons. 

Mistaken Manual Entry

You have someone who manually enters payroll and they made a mistake. A typo or miscalculation led to more hours or money added to someone's paycheck.

Time Clock Errors

Time clock errors are a problem many companies struggle with. An employee may forget to clock back in after lunch, or forget to clock out at the end of the day. Maybe the fingerprint reader or card reader didn't register their scan. This can cause payroll errors. But so, too, can manual corrections of clearly wrong time clock records that accidentally credit the employee with a few too many hours.

Math Error in Pay Modifiers

Miscalculating pay modifiers can also lead to overpayment. For example, a mistake in withholding or in calculating overtime pay can lead to a paycheck that is heavier than it should be.

Compliance on Taking Back Overpayment

State laws are often very specific regarding the legal options to recoup overpayment to an employee. We'll take a closer look at the laws of New York and New Jersey on wage overpayment.

New York

• You have 8 weeks to notice and begin the process of recouping overpayment
• Must give a 'Notice of Intent' before wages are deducted to correct the balance
  • 3 days before a lump deduction
  • 3 weeks before a periodic deduction to reach the total overpayment balance.
• May not deduct more than once per pay period
• A lump deduction can be made if the overpayment is equal or less than the next paycheck
• Routine deductions cannot reduce pay below minimum wage
  • Also limited to 12.5% of gross wages
• Employers are required to notify employees of this procedure to dispute the overpayment and terms of recovery, or even to request a delay in  s the recovery of the overpayment.

New Jersey

In contrast, New Jersey does not have any specific overpayment laws. This means the legal compliance issue defaults to federal law. Under federal law, employers are allowed to deduct the overpayment from future paychecks, even if this reduces the pay to below minimum wage. This can be done without notice. However, New Jersey employees do have the right to appeal deductions they feel were done in error.

Implications of Taking Back Pay

There are several important considerations when planning to recoup the losses from overpayment.

You'll need to include:

• The state where you do business and where your employee works
• The amount of time since the overpayment
• Tax implications when correcting payroll records

However, it is also important to consider the implications on a human level. In many cases, the solution is worse than the problem when it comes to employee relations. It is important to choose a path that will not create hostility or resentment in your employee.

How to Collect Overpayment 

There are several options to recoup overpayment of wages to an employee. It is important to take actions that are both legally compliant and considerate of the employee experience.

First, notify the employee immediately of the problem and their options for restoring the balance.

Here are a few recommendations: 

• One lump repayment out of their next paycheck. 
  • This is the least likely to wreck an employee's finances if they were very recently overpaid.
• A gentle deduction over time
  • This is more reasonable for employees who were overpayed more than one or two months in the past, so their income finances are not impacted.
• Trade the overpay for PTO or the financial value of other benefits
  • Some employees will prefer to leave their future wages untouched, but trade for the value of benefits.
• Immediate repayment by check
  • Leave this option open, though most employees will not prefer it. Some would rather correct the issue immediately rather than see future paychecks or PTO impacted.

It is best to secure the employee's agreement in writing regarding how you will balance the overpayment. Then, you can take the necessary steps in compliance with federal and/or state laws.

Simplify Your Overpayment Remedy with MegaPay

Correcting overpayment must be done promptly and with caution to avoid penalties and complex tax implications.

Reach out to MegaPay to learn more about how having a payroll provider can help with the difficult matter of recouping overpayment (and preventing it to begin with)!