An employee might receive a salary overpayment if his employer failed to stop his paychecks after his employment ended. It can also happen if the wrong amount of salary was entered in the system, or if a duplicate check was created. To recover the overpayment, you must consider the legal requirements. Before doing anything, consult federal and state laws and, if necessary, seek legal counsel.
Under federal law, you can recover the entire overpayment from the employee’s next paycheck even if it causes her pay to go below the required minimum wage. You do not need her consent to make the deduction. Federal law regards the overpayment as unearned money that was advanced to the employee and should therefore be paid back.
Before you recover salary overpayments, consult your state's labor department for its overpayment guidelines. The state might follow federal law, or it may have different guidelines. For example, the state might say you must obtain the employee’s written consent to make the deduction. Also, you might not be allowed to make the deduction if it will reduce the employee’s salary to below the minimum wage rate. Some states set a precise limit on the amount that can be deducted for overpayments, such as no more than 15 percent of gross salary for the pay period. You might also have to give the employee notice before making the deduction.
If the overpayment happened on an employee’s final paycheck, you must contact him and let him know so he can pay the money back. However, it might be difficult to recover the money if he refuses to pay it back. The state might allow you to deduct the overpayment from additional wages due to him, such as accrued vacation time. Or, it might not allow this practice. Again, check your state laws for clarification. If the employee received a duplicate check, you can simply place a stop order on the duplicate check. For duplicate direct deposit transactions, you can reverse the extra money out of his bank account as long as the money is still in there. Other options are to take legal action against the employee if he refuses to pay back the amount owed, or hire a collection agency to recover it.
When you overpaid the employee, she paid taxes on the extra amount. When she pays back the money, the payroll system automatically credits her for the overpaid taxes. This process adjusts her W-2 wages and taxes as well. If the overpayment and repayment happened during the same year, the employee’s W-2 should be correct and would not show the overpayment. However, if the overpayment and the repayment occurred during different years, you must give the employee a corrected W-2 for the year that the overpayment took place. The employee would then use the corrected W-2 to file an amendment to her tax return for the year the overpayment occurred in.