Overpaying or underpaying employees seems like an easy problem to avoid. But it’s a serious challenge that plagues small and medium-sized businesses alike. In 2019 alone, the DOL collected a record $322 million in back wages for employees. With more crackdown and higher penalties, businesses need to be more prepared than ever before.
But Penalties Aren’t Your Only Problems
Keep in mind the DOL won’t be your only headache. Employee satisfaction, brand reputation and your bottom line are all at risk. To help, here’s everything you need to know should you ever incorrectly pay an employee.
What Should You Do If You Overpay an Employee?
Let’s start with the basics: According to the Fair Labor Standards Act (FLSA), employers that make a one-time overpayment to an employee can recoup the overpayment by deducting that amount from the employee’s next paycheck. (Keep in mind state regulations can differ.) But don’t go rogue. Keep your employees informed by following these 4 steps:
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- Determine how much you overpaid the employee during the pay period.
- Contact the employee you overpaid and breakdown the situation (no need to panic)
- Inform them you plan to deduct the overpayment out of their next paycheck
- Ask them if this will cause a financial burden (remember, when an employee receives extra money–whether they notice it or not–they may spend it right away).
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- If yes, try to arrange installments that you both agree on. This will hopefully reduce the changes of resentment.
- If no, simply make the deduction.
Deducting money from an employee’s paycheck can be awkward. To help, here’s a templated email we created to make your life easier. DISCLAIMER: This is NOT intended to be legal advice.
Hello [NAME],
In a recent audit, we discovered that we accidently overpaid you by [$ AMOUNT] on [DATE]. To remedy the situation, we’ll need to deduct [$ AMOUNT] from your next paycheck on [DATE].
If this deduction will cause a financial burden, please let me know. We can do [#OF INSTALLMENTS] smaller deductions over [#OF PAY PERIODS] pay periods.
Thank you for your patience and understanding,
[YOUR CONTACT INFORMATION]
What Should You Do If You Underpay an Employee?
Underpayments happen for many reasons, but none more than human error. If you’re lucky and you’ve found the error before the Wage & Hour division, here’s what you should do.
- Calculate how much the employee was underpaid
- Inform the employee of the mistake and the next course of action (repayment)
- Remedy the situation by including the missed wages in their next paycheck
- Get the employee to sign an acknowledgement that the error was fixed
Keep in mind, the statute of limitations on underpayment is two years or three in the event that the underpayment was deliberate.
How do I avoid incorrectly paying employees?
Because the number one reason for overpayment or underpayment is human error, you should consider automating your payroll process if you haven’t already. You should also remain up-to-date with best practices by subscribing to email newsletters of government departments like the DOL and Wage & Hour division.
Paycor’s Perfected Payroll Solution
We spent more than 20 years perfecting the payroll process. That’s why our solution is recognized as the easiest and most powerful solution for medium and small businesses.
With Paycor Payroll, you can ensure your employees are always paid accurately and on-time. But that’s just the tip of the iceberg.
- Quickly and easily pay employees from wherever you are
- Generate and print pay stubs from the cloud
- Set up earning, deductions and taxes without having to contact your provider
- Get proactive alerts of pay-related changes and problems before they occur
- Access a dedicated team of tax experts who handle processing for you and help maintain tax compliance