Can an Employer Take Back Wages Paid?

A payroll mistake usually doesn't mean more money in your pocket.

Getting unexpected money in a paycheck may seem like a fortunate error to an employee, however, overpaid wages aren’t free money. If the overpayment turns out to be a mistake on the employer’s part, in most states the company has a right to take back the overpaid wages from the employee.

The Overpayment of Wages

The overpayment of wages is when an employer pays an employee more wages than he earned for a pay period. Overpayments can be the result of bookkeeping, computer or other errors. Under the U.S Department of Labor’s Fair Labor Standards Act (FLSA), overpaid wages may be deducted from the employee’s paycheck — even if the deduction cuts into an employee’s minimum wage or overtime pay. However, an employer is not allowed to charge any administrative fees or interest on the payments that bring an employee below the federal minimum wage of $7.25 per hour.

Notice of Overpaid Wages

In most sates, an employer must notify an employ of the overpayment — usually in writing — and include the amount of the overpayment, the reason for the overpayment and a request for repayment. The employee usually then has a certain amount of time, depending on what state he lives in, to either contest the overpayment or set up a repayment plan with the employer.

Collecting Overpaid Wages

The specific laws about the timeline, collection and repayment for overpaid wages vary by state. Some of the ways employers can recoup overpaid wages include setting up a payment plan; deducting the overpaid wages from an employee’s paycheck; assigning the debt to a collection agency; or taking legal action against the employee. Many employers will try to work out a payment plan with an employee before deducting the wages from future paychecks. If an employer chooses to deduct the wages from an employee’s paycheck, the deduction can be taken in the pay period immediately following the overpayment or in a subsequent pay period once the money owed is determined. The amount an employer deducts — whether it’s a full or partial repayment — is usually at the discretion of the employer, but some states have limits on the amount that can be deducted per paycheck. If an employee resigns or quits his job before the overpaid wages are recouped, the employer may obtain a court judgment against him and have his wages from his new job garnished.

Direct Deposit and Repayment of Overpaid Wages

A lot of employers use direct deposit — the electronic transfer of money from an employer to an employee’s bank account — to compensate employees. Direct deposit is just that, though, an employer cannot use it to deduct money from an employee’s bank account. An employer cannot ask an employee’s bank or financial institution for a refund of overpaid wages. An employee also cannot give an employer permission to deduct funds directly from his bank account.

References

• U.S. Department of Labor, Wage and Hour Division; FLSA2004-19NA
• Washington State Legislature; Overpayment of wages — Notice — Review — Appeal
• Oregon.gov; Overpayment Of Employee Wages; Technical Assistance: FAQs
• Minnesota Department of Labor & Industry; Frequently asked questions -- wages and overtime