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What to Do When You Overpay Employees

Frustrated business owner looking at his computer

It’s easy to mistype data when you’re manually entering time records into a payroll system by hand. If you’ve made payroll mistakes in the past, you’re not alone. Studies by the American Payroll Association show us that approximately 40% of business owners make payroll mistakes annually. This results in an average of $845 in IRS penalties every year. In order to avoid this, many business owners have invested in online time tracking services that calculate records automatically. This type of software transfers your employees’ time records to payroll and accounting software platforms with ease, avoiding the need to enter time manually. If you’re manually entering data every pay cycle and you’ve made a payroll mistake, you might wonder how to handle it and, more importantly, when you need to handle it. We can help.

What is an Overpayment?

An overpayment occurs when an employer either overpays an employee beyond the agreed-upon rate or has paid them more than the actual amount of hours they worked. For example, you might pay an employee for 69 hours worked instead of 59 hours or you might pay an employee $18.00/hr instead of $16.00/hr. Whatever the case may be, you overpaid and you need to fix it.

Paying Your Employees Correctly is the Law

The federal government requires employers to pay their employees at least minimum wage for all hours they work along with any overtime earned. This means that you must track employees’ time correctly for payroll, which includes proper time tracking of attendance, meal breaks, overtime, and more. If time isn’t tracked properly, you may overpay or underpay employees, which is never a good thing.

Statute of Limitations

When you make a payroll mistake, you must take care of it as quickly as possible. The Department of Labor (DOL) has rules regarding how timely you must be in correcting errors when you overpay employees. Additionally, individual states have their own regulations with regards to how soon you must take care of overpayments or underpayments. The laws change depending on where you reside, so it would be wise to check with your local government or follow up directly with an HR representative in your area.

Underpaying Employees

Although this article focuses on overpayments, we wanted to touch on underpayments because they’re bound to happen too! If you underpay employees, your state most likely has laws regarding how and when you should handle that. Generally, you’ll want to take care of this as soon as possible; however, some states allow employers to take care of this within a few weeks. Some states, for instance, allow employers to pay employees their earned wages during their next payday. In Texas, for example, they require employers to pay their employees “as soon as possible”, but don’t necessarily give a hard deadline. Meanwhile in Oregon, employers must pay employees by their next paycheck. Basically you should try to take care of this A.S.A.P.

Overpaying Employees

If an employee is overpaid, an employer can legally reclaim that money back from the employee. However, that employer usually only has a certain amount of time to claim that money back. You may only have a few weeks or, in some states, as long as a few years to claim money back from an employee. For example, those in New York must obtain overpayments within 6 years of the initial overpayment:

The employer may only recover such overpayments as were made in the eight (8) weeks prior to the issuance of the notice described in subdivision (e) below. The employer may make deductions to recover overpayments for a period of six (6) years from the original overpayment.

New York State Department of Labor

Overall, you’re going to want to check with your local labor board to see what your state’s specific timeline allows. You may have years, months, or sometimes only a few weeks to bring up any compensation discrepancies with your employees.

How to Fix Payroll Errors

If you already submitted data for payroll processing and realize there was a mistake, you should try to act quickly. If possible, cancel the paycheck processing, which would give you the ability to fix the mistake and resubmit time for payroll before the paycheck gets into their hands. Although that’s the ideal situation, it doesn’t always work out that way. Normally you don’t realize that you overpaid an employee until after they get their paychecks and you wonder “what the heck happened here?” If you don’t fix this error in a timely manner, you may lose the opportunity to get your money back. Here are ways to get a handle on this:

  • Alert your federal and state entities that a mistake was made
  • If possible, cancel the payroll immediately, fix it, and reprocess it
  • Run an additional payroll report with the necessary adjustments for the affected employees only
  • Make adjustments on the next payroll cycle to counteract the mistake

Ultimately, you’ll want to take care of these errors in a timely manner based on your state’s regulations.

How to Recover an Overpayment

Employers can retrieve overpayments from employees in one lump sum or in installments. Whatever you decide, it’s wise to create a written agreement with both the employee’s and employer’s signature. This will protect both parties from future disputes.

Overpaying an Employee Who Left the Company

Employers have the right to claim overpayments, even when an employee is no longer working at the company. It can be slightly more difficult for an employer to claim overpayments with someone who’s already gone, but it’s possible. If you decide to obtain compensation from an employee who received more money than earned, you must take action quickly. Please note that when you seek repayment, the employee can refuse the request. This may result in you having to take court action. Sometimes the court action and lawyer costs are more than the overpayment itself, so it’s wise to think about that before proceeding.

Employees Defending Overpayments

It’s not always a simple task to recover overpayments from employees. If they believe that they were entitled to the money given and also relied on that money the recieved, they can defend their right to keep their wages. As long as the employee was not at fault for the overpayment, their claim is likely to succees. After all, their extra wages weren’t their mistake.

It’s suggested that you reach out to the employee and discuss what happened before claiming their wages out of the blue. Have a chat and talk about how you can take care of your over-payment. Just remember to get any agreement in writing to protect yourself and the employee.

Avoiding Overpayments

You can avoid overpayments by investing in an online time tracking service that tracks time efficiently and effectively. Without the need to enter time manually, you’ll be significantly less likely to make payroll mistakes that overpay or underpay your employees. You’ll want to make sure that you find a system that tracks attendance accurately, has overtime settings that conforms to your state’s regulations, and applied the proper pay rate to each employee. With that in mind, you’ll hopefully never have to worry about payroll errors again.

Do you need a reliable time tracking system? Try Timesheets.com!

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One Comment

  1. Roger Hunt
    Roger Hunt October 1, 2020

    Great post!, This content is very very great content, I got really good information from this content and it helps me a lot, I hope it can help many people like me.

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