Step 1: Gather Data
Before taking any action to correct overpaid wages, you’ll need to get your facts straight. It’s important to be able to actually prove that overpayment occurred.
- Review payroll records. Go through your payroll records for the affected pay period(s) to identify any errors or inconsistencies. This may include reviewing timesheets, pay rates, deductions, and other relevant data.
- Identify the cause. Once you've spotted the error, determine the root cause of the overpayment. Was it due to a data entry mistake, miscommunication, or another issue? Understanding the cause will help you prevent similar errors in the future.
- Calculate the overpayment amount. Determine the exact amount of the overpayment by comparing the employee's correct pay with the amount they received. Make sure to account for any applicable taxes and deductions.
- Document your findings. Keep detailed records of your assessment, including the cause of the overpayment, the affected pay period(s), and the overpayment amount. This documentation will be useful when notifying the employee and making any necessary adjustments to your payroll system.
Step 2: Check State Laws and Company Policies
Once you’ve documented the overpayment, you’ll need to make a plan for recollecting. That requires following both company policies and state overpayment laws.
For employers in the United States, the Department of Labor allows for you to recoup wage overpayments from employees, even if doing so brings their average payrate below minimum wage for their next paycheck. Additionally, many states regulate how overpayment may be deducted from a future paycheck.
If available, your human resources department or legal team can be great resources for guidance. Your company handbook may also outline a policy for correcting payroll errors. You can also do you own research on your state laws to make sure you’re compliant
Step 3: Notify the Employee
When addressing the overpayment of wages, it’s best practice to notify the employee in writing. While having a heart-to-heart discussion may be a good place to start, you should follow up by providing notice in writing. There are several reasons for this.
- Documentation. The written notice creates a record of the issue, which may be necessary for legal or auditing purposes. It also helps ensure that both you and the employee have a clear understanding of the situation.
- Transparency. Providing a clear explanation of the error and the amount to be recovered helps maintain transparency and trust between you and the employee. It shows that you are addressing the issue professionally and fairly.
- Opportunity for review. Giving the employee a written notice allows them to review the details of the overpayment and verify that your calculations are correct. This can help prevent potential disputes or misunderstandings.
When drafting the written notice, make sure to include:
- A clear explanation of the error that led to the overpayment
- The exact amount of the overpayment
- The pay period(s) affected
- Reference to relevant state laws and company policies
- A request for the employee to contact you to discuss repayment options
- Your contact information
To make it easy, here’s an example for a payroll overpayment letter. Note that this letter is just a sample to help you get started. Consult your local laws and obtain legal advice before attempting to recollect overpaid wages.
Template: How to Inform an Employee That They've Been Overpaid
Dear [Employee’s Name],
I’m reaching out because of an unfortunate payroll error. While auditing our records, we discovered that, for the pay period of [Pay Period Dates], you were overpaid by [Dollar Amount].
After further review, we determined this overpayment error was caused by [reason]. While we take precautions to prevent these types of payroll mistakes, they still happen from time to time.
To ensure accuracy, the company needs to correct this overpayment. However, we are committed to working with you to make sure that this correction does not cause undue financial burden.
Let’s meet and come up with a plan that makes sense. Would [time] on [date] work for you?
Step 4: Discuss Repayment Options with the Employee
After you’ve informed your employee of the error, you’ll (hopefully) be able to work together to establish a repayment plan. Create a plan that is fair and manageable for both parties, and won’t place undue financial burden on your staff member.
Keep in mind that money is often an uncomfortable subject. Your employee may not want to be completely transparent about financial struggles or living expenses. When creating a plan, consider the following:
- Financial impact. Ensure that the repayment plan won’t cause undue finanical hardship for the employee.
- Timeframe. In many cases, you’ll need to spread the repayment plan out over several pay periods. A longer repayment period may be necessary for larger overpayments
- Frequency. Determine how often the repayment will be collected. For example, if you pay your employees on a biweekly basis, it may be easier for the employee to make monthly repayments.
- Repayment methods. Many employers will deduct the overpayment from a worker’s future wages. However, discuss the preferred repayment method with the employee.
Possible repayment options include:
- Lump-sum payment: The employee repays the entire overpayment amount in a single payment. This option may be suitable for smaller overpayments or if the employee has sufficient savings to cover the amount.
- Payroll deductions: Deduct a portion of the overpayment from the employee's future paychecks until the full amount is recovered. This option allows the employee to repay the overpayment gradually and may be more manageable for them.
- Combination: A combination of lump-sum payments and a payroll deduction may be used, depending on the employee's financial situation and preferences.
Once you and your employee come up with a plan, document it in writing. Provide a copy of this document to the employee. This will help to avoid misunderstandings and ensure both parties are aware of their obligations
Step 5: Adjust your payroll
After being sure to comply with state regulations and agreeing on a repayment plan with your employee, you’ll need to adjust your payroll records.
One essential step is addressing tax implications. Because overpayment can result in excess tax withholdings, you’ll need to adjust your tax liabilities. You may also need to file amended payroll tax forms with the appropriate agencies.
In some cases, you may decide that recollecting wages just isn’t an option. In that situation, you’ll have 2 options:
- Don’t do anything. When the time and resources needed to collect repayment outweigh the loss, it’s probably best to let the overpayment slide.
- Overpay everyone. When an overpayment results from a systemic error (like incorrect pay rate), you can consider adjusting everyone’s pay to match.
Only consider these options if it’s financially viable for your business, and if you believe it’s the right thing to do