Employees can be overpaid in even the most well-managed payroll department, but it isn’t always the result of an error. Perhaps the employee received a sign-on bonus but did not stay for the required length of time. Or the employee was on advanced vacation but is now terminating before he or she has fully earned the time. No matter the reason, overpayments can and do happen and must be handled properly.
The questions that usually arise relate to IRS regulations are: what is required if the overpayment occurred this year? But what if it occurred in a previous tax year, does that change the rules? Are the rules different for federal income tax than they are for social security or Medicare taxes? Recouping overpayments is also much more complex than just adhering to the IRS code! Wage and hour law compliance must also be honored when dealing with overpayments.
Before the payroll department even needs to determine IRS requirements they must first determine if recouping the overpayment is even legal under the FLSA. Issues such as exempt employee status, minimum wage, and overtime rules for nonexempt employees must be considered when recovering overpayments from employees. And of course, the overpayment did not occur in a vacuum when it comes to state laws.
Each state may have its own compliance issues involving wage and hour laws! But the most important thing that we need to know is whether there is a time limit for recouping the overpayment in that state. Does the employee have to be notified in advance before the deductions can begin? Or does the state just say NO! to the whole process?
