Seyfarth Synopsis: California Labor Code § 221 states it is “unlawful for any employer to collect or receive from an employee any part of wages … paid … to said employee.” In other words, employers cannot just take money back to correct an overpayment of wages. But what if you discover you’ve accidentally overpaid an employee?
It’s not a back to school special—it’s a windfall (and a shopping trip)! No, actually, it is an employer overpayment of an employee’s wages. It happens and unfortunately, enough employers have gone about recovering overpayments the wrong way, leaving a trail of court cases and waiting-time penalties.
So, as an employer, can you recover an overpayment of wages to an employee? The answer is a resounding … maybe!
Get Into the Black Friday: Can I Deduct the Overpayment from the Regular Paycheck?
No. Employers often run afoul of California law when they automatically deduct wages from an employee’s paycheck or final pay to recover an overpayment of wages. Even if an employee orally agrees that the employer can withhold an overpayment—either as a lump sum deducted from the next paycheck or in installments deducted from several paychecks—the employer may be violating the law. It is highly recommended to get any repayment agreement in a writing signed by both the employee and employer.
Try to Strike A Deal
When an employer discovers an overpayment of wages, it is best to first approach the employee and explain it. Perhaps the employee has not noticed the overpayment and is agreeable to writing a check to return the overpayment. More often, employees will find it more convenient to make good on overpayments over time, and often through payroll deductions. This practice is acceptable so long as the agreement is in writing, is voluntary, and is signed by the employee. Also, if an employee leaves the company with remaining repayment installments, the employer cannot deduct the remaining balance from an employee’s final pay, absent a fresh written agreement. See Barnhill v. Sanders, 125 Cal. App. 3d 1 (1981).
Outstanding amounts owed by an employee at separation can be difficult to recover and may require the employer to file in court. Many amounts can be recovered through small claims court but amounts over $10,000 must be recovered in Superior Court. Court actions to recover overpaid wages may be cost prohibitive, but an employer successful in court can obtain a judgment and garnish the employee’s wages (from the next employer) to recover the overpayment.
Watch Out for Minimum Wage!
When you enter into a recovery agreement with an employee for an overpayment, be careful that any payment does not result in the employee’s wages dipping below minimum wage for that pay period.
Unlawful Deductions Can Lead to More Free Money!
If an employer makes an unlawful deduction from an employee’s paycheck to recover a wage overpayment, the aggrieved employee can file a wage claim with the DLSE or file a lawsuit. A finding against an employer could expose the employer to penalties and the employee’s attorney’s fees. Employees may also succeed in retaliation claims if they are discharged or suffer other adverse employment action for filing a claim with the DLSE or for complaining about an unlawful deduction.
What if an Employee Refuses to Repay the Overpayment?
Employees who defy their obligation to repay overpayments can be discharged, absent special circumstances. And if an employee is exhibiting dishonesty by refusing to repay money obtained in a windfall, then even the EDD may think twice, and deny unemployment benefits.
- Develop a written policy in your Handbook to address procedures for overpayment of wages.
- Review the remedies for overpayment to employees with your payroll personnel.
- Be mindful of finding a repayment option that will not cause financial hardship for the employee.
- When in need, contact your favorite Seyfarth lawyer to draft a repayment agreement for you.
Edited by Christopher J. Truxler