What Happens When You Pay an Employee Incorrectly

Mistakes are an unfortunate business reality, but mistakes with payroll are different – and potentially extremely problematic.  When you overpay an employee, you lose money. When you underpay an employee, you agitate him or her – and could potentially face legal repercussions. These instances occur more frequently with hourly employees but can happen to salaried workers as well. Here's how to handle each situation.

Overpaying an Employee 

Most situations allow employers the right to regain over-payments, but laws differ from state to state. In every occurrence, notifying the employee of the error must happen before any attempt to retrieve the money. Some employees will tell you whether you've overpaid them, while others may simply not notice or choose not to alert you.

It is helpful to have payroll records that prove the over-payment readily available when alerting an employee. You cannot request remuneration without valid proof. Most states allow employers to make deductions from a future paycheck that covers the over-payment after the payroll department has effectively notified the employee.

However, some states do not. In Oregon, you must reach an agreement on how best to re-pay the funds with the employee before proceeding. If you alert an employee and he or she refuses to repay you, you can legally sue that employee. In Washington, employees must consent to a payroll deduction after being notified of the issue. They can also repay the amount via a personal check. Washington also allows employers to take legal action against workers refusing to repay them.

Remember to always adhere to federal and state minimum wage laws. You can't deduct from a future paycheck if that results in an hourly rate below minimum wage. In this situation, you'd have to deduct from several future paychecks to abide by the law.

Underpaying an Employee

If you underpay an employee, it is integral to begin the process of repayment as soon as possible. An underpaid employee has every right to demand his or her money back – and as soon as the next paycheck. Late payments accrue the longer you take to pay an employee back. If underpaying an employee is a consistent issue due to complicated local taxes or withholding rates, consider investing in a local tax identifier.

Have records of the error and ensure your employee has seen them by having him or her sign off on the correction. Employees have up to two years to take legal action if the problem is never corrected. If for whatever reason, you intentionally underpay an employee, that employee has up to three years to act;

Keeping meticulous records and vigilantly ensuring software is functioning properly can help you avoid potential penalties, upset employees, legal measures, or any other problem arising from improper payments. And if they do, having these files will also help you correct them quickly, and keep your business humming along.