How to Recoup Funds (Legally) When You Overpay Employees

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How to Recoup Funds (Legally) When You Overpay Employees

While many payroll systems out there are automated and calculations are done electronically using specific software, most of them still require some sort of human input and review. This might include employees entering hours on their time sheets, data entry by human resources or payroll processors, and manual review of calculations for accuracy. 

Unfortunately, humans make mistakes and payroll errors can lead to an employee’s paycheck being issued for the incorrect amount. When an employee’s paycheck is short, the fix is relatively easy. Depending on the department’s internal practices, the payroll team can calculate what the correct amount should have been and issue payment for the difference, or void the original paycheck and re-issue the correct amount. With overpayments, however, the fix may not always be as simple. 

Overpayment is Discovered Before Being Received by the Employee

The timing of when the error is discovered can make things especially complicated when dealing with employees who have been overpaid. If the error is caught before the check (or direct deposit) has actually been issued to the employee, there may be a possibility of voiding the original transaction and reprocessing for the correct amount. Circumstances can vary, so confirm with the bank or service provider to make sure there is enough time to guarantee that the incorrect amount will not actually be paid. If the payment is already en route to the employee, a stop payment may need to be placed or a recall ordered on the direct deposit transaction. A heads-up to the impacted employee to let them know a correction will be made can be helpful, so they’ll know not to cash or deposit the check and/or won’t be caught by surprise when the direct deposit is reversed from their account. 

Overpayment is Discovered After Being Received by the Employee

If the error is discovered after the payment has already been received by the employee, it may be too late to recall the deposit or place a stop payment on the original check. In these situations, communication is key. If you have a good relationship with the employee, they may be willing to repay the net amount back to the company, and the payment can be voided and reprocessed. If the employee is uncooperative, that can complicate things. They may have already cashed the check or withdrawn the deposited amount, which can make recovery difficult or impossible. 

In these scenarios, the company may be able to reduce the employee’s pay on future pay dates to recoup the overpaid amounts. However, state rules and regulations may vary and might require the employer to limit deduction amounts or place restrictions on the timing of when corrections can be made. In some cases, this could mean the employer has no recourse if the error is not discovered and addressed within the allowable timeframe. 

Prevention is Key

Once the corrections are made, it can be helpful to identify the cause(s) of the error and implement new tools or processes to prevent the error from happening again. Some of the best ways to reduce errors include adopting an electronic solution and working with a payroll service provider. At Valor Payroll Solutions, our digital solution, dedicated payroll specialists, and compliance experts and  can help ensure your employees are paid correctly and on time, every time. Contact us today! 

 

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Christina Hageny

President - Valor Payroll Solutions

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Christina Hageny

President - Valor Payroll Solutions

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