We Accidentally Overpaid an Employee—We Can Just Take It Out of the Next Paycheck, Right?

It seems that common sense would dictate that if an employee receives a windfall of unearned and unexpected money, that an employer could recover that amount from the employee’s next paycheck.  But as those familiar with legal issues know, the law and common sense do not always overlap.  And unfortunately, a number of employers are unaware of restrictions that various states have put in effect regarding deductions from paychecks generally, as well as deductions from paychecks for overpayments and advances.

Take New York, which has some of the most stringent restrictions on paycheck deductions in the country.  If you overpay an employee, you may be able to recover the money by payroll deduction—it’s not automatic.  For example:

• You must notify the employee within eight weeks of the overpayment about your intent to deduct the overpayment.  If you discover the overpayment more than eight weeks later—sorry.  You’re out of luck.
• If the overpayment is less than an employee’s net wages in the employee’s next paycheck, you can deduct the total amount from the employee’s next paycheck, but you have to give at least three days’ notice before the payment is due.
• If the overpayment exceeds the employee’s net wages in the employee’s next paycheck, then it will take some time and effort to get it back: (1) you have to inform employees three weeks before the first deduction, (2) the deduction cannot exceed 12.5% of the gross wages for that wage payment, and (3) the deduction cannot reduce the employee’s effective hourly rate below the state minimum.  That means that the earliest you can recover a large overpayment amount through payroll deductions is eight pay periods—and if you have an employee at or near the minimum wage, it could take years to recover the overpayment through payroll deduction.

And that’s just overpayments.  New York has likewise enacted laws and regulations regarding making advances to employees that are so onerous, few employers opt to provide such advances—unfortunately, to the detriment of employees. Bottom line, anytime you are considering making a deduction from employee’s pay, whether for overpayments, advances, or other money that may be owed to you by the employee, it is highly advisable to check your state-specific requirements.

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