In the world of payroll, perfection is the standard, but human error is the reality. Whether it’s a clerical slip-up, a double-processed timekeeping file, or a typo adding an extra zero to a bonus, inadvertent overpayments happen to even the most diligent employers.

When the error is discovered, the gut reaction is often: “We’ll just deduct it from their next check.” However, in the realm of employment law, recovering those funds is rarely that simple. Failing to follow federal wage-and-hour rules—or state-specific protocols—can turn a simple accounting correction into a costly legal dispute.

While states largely control how overpayments may be recouped, federal law sets important guardrails.

Under the Fair Labor Standards Act (FLSA):

1. Minimum Wage and Overtime Protections Still Apply
Any deduction to recover an overpayment cannot reduce a non-exempt employee’s pay below the federal minimum wage for the workweek, nor can it cut into legally required overtime pay.

That means even if an employee owes money back, employers generally must structure repayment so the worker still receives at least minimum wage and full overtime for that pay period.

2. Timing Matters
If a deduction delays payment of wages that were actually owed, it could trigger claims for late payment under federal or state law—especially if the employer reverses an entire direct deposit and does not promptly reissue the correct amount.

3. Recordkeeping Obligations
Employers must maintain accurate payroll records reflecting the correction, any deductions taken, and the method of repayment. Sloppy documentation can compound risk in an audit or investigation.

4. Deductions Must Be Lawful
The FLSA distinguishes between permissible deductions and those that primarily benefit the employer. Recovering a true overpayment may be allowed—but only if done in a way that complies with wage-floor requirements and applicable state law.

Federal law sets the floor. State law often adds the ceiling.

There is no federal “one-size-fits-all” rule for overpayment recovery. Instead, employers must navigate a complex patchwork of state statutes and wage-payment laws. For example:

• Strict Consent States: In California, employers generally cannot unilaterally deduct overpayments from wages. Written authorization is required, and employers are typically prohibited from deducting from a final paycheck.
• Notice-Heavy States: New York allows recovery but imposes detailed procedural rules. Employers must provide advance written notice, follow specific deduction schedules, and give employees an opportunity to dispute the amount.
• More Flexible States: States like Hawaii or Pennsylvania may allow more leeway. Hawaii treats prompt correction of a computational error differently than other deductions, and Pennsylvania may view a one-time mistake as an advance on wages.

If the error is discovered within five banking days, employers may be able to initiate an ACH reversal of a direct deposit. But this is an all-or-nothing option—you must reverse the entire transaction.

If the employee was owed part of that paycheck, reversing it without promptly issuing the correct amount could mean wages were paid late, potentially triggering federal or state penalties.

To reduce risk, employers should adopt a consistent, legally compliant process:

• Formal Written Notice: Provide a letter explaining the error, the affected pay periods, and the total amount overpaid.
• Repayment Flexibility: Offer options—such as repayment by check or a reasonable installment plan—so deductions do not violate minimum wage or overtime requirements.
• Signed Authorization: Whenever state law requires or best practice suggests, obtain written consent for any payroll deduction. This is often the strongest defense against “unlawful deduction” or “theft of wages” claims.
• State-by-State Review: Because rules vary dramatically, employers with multi-state workforces should tailor protocols to each jurisdiction rather than applying one blanket policy.

While the money may belong to the company, the method of recovery is governed by overlapping federal and state rules that vary by zip code—and by employee classification.

Before trying to balance your books, make sure your approach complies with the FLSA and the wage-payment laws in every state where your employees work.

Our team can help employers develop compliant protocols for handling payroll errors before they turn into legal headaches. Contact us to learn more.