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What can I do if an employee is overpaid?

Overpaying an employee creates less concern from a legal standpoint than underpaying because this does not violate any state or federal laws. It's legal to overpay your employees. Still, you should correct the error once you discover it in order to prevent it from happening again. If you use an Employment Contract, you might consider adding an Employment Agreement Amendment to address how overpayments will be handled. 

First, if possible, halt or cancel the payroll, and notify affected employees of the problem, if you have not yet issued direct deposits or checks. If the checks have already gone out, you can still recoup the overpayment later, but it will require more work. Under federal law, the Fair Labor Standards Act allows you to take certain steps to recover the overpayment as part of the employee's next paycheck. But, keep in mind that several states may have specific labor laws that might impact how an employer can recoup an overpayment.

Keeping the employee informed about the overpayment is important. You should determine how much the overpayment was and provide an itemization of the overpayment to the employee. Then, in most instances, you can deduct the overpayment in the next pay period. For some employees, or depending on the amount, this may be a hardship. In those situations, employers have the option to deduct the overpayment over several pay periods in smaller increments to soften the impact. If the overpayment was significant, using this method might be a good idea. 

If the employee quits after the overpayment, or you are concerned about your state's labor laws, you may want to ask a lawyer about your options.

How can I avoid liability if an employee is underpaid?

When you pay an employee less than you should, that worker may have the option to file a civil lawsuit against you for violations related to:

  • Overtime payments.
  • Minimum wage laws.
  • Missing benefit payments.
  • Other related technical pay violations, such as failing to issue pay stubs.

If you know that you underpaid an employee, correcting the mistake before you get sued can limit or reduce your liability drastically, potentially eliminating it entirely. Underpaying an employee may result in fines, penalties, backpay, and you may have to pay interest too. In general, the longer you wait to correct the mistake, the higher your penalties may be if you get sued.

What can I do to not get sued over technical pay violations?

In addition to the general requirement to pay employees as promised, technical requirements must be met as well. For example, you likely need to withhold taxes and issue pay stubs. For many labor law violations, there may be no escaping a lawsuit for what happened in the past. Fortunately, you can fix the mistakes moving forward by complying with all the requirements, so you won't have to worry about it happening again.

The best way to deal with these issues entails knowing, understanding, and meeting all of your obligations when it comes to the technical requirements for paying your employees. Not knowing what you are required to do is not a defense to a lawsuit. To protect your business, you may want to consider hiring a payroll processor, bookkeeper, accountant, or attorney to help you fulfill your technical obligations to your employees. You can also speak with a Rocket Lawyer On Call® attorney about your specific questions and to get the right information about the laws in your area.

How can I fix a mistake in an employee's withholdings?

Fixing an employee's withholdings starts with ensuring that the employee has the correct information on their W-4. You can only accurately withhold payroll obligations if the employee gives you the correct details.

If you withheld too much from an employee to address payroll expenses or taxes, then you must refund the employee that money. You can directly refund the employee or you can withhold less from future paychecks until the contributions even out.

If you did not withhold enough from the employee, you might be able to:

  • Withhold more money from future paychecks to balance out the amount owed.
  • Pay the difference on your own.
  • Tell the employee about the mistake and let them know that they need to fix the problem on their own at tax time.

Under any of these circumstances, clear communication with your employee is vital. When employees are informed and know you are taking corrective action, they are less likely to file a complaint.

How can I correct a gender pay gap?

For various reasons, women often receive lower wages than men for the same work. If you believe your business might be paying employees unequally due to their gender, do not delay taking action. 

You will want to conduct a pay audit to determine whether a gender pay gap exists between your workers. Determine individual job tasks and compare the wages paid. You may need to undertake a critical review for certain employees who make more or less for the same role. Ultimately, closing the gap can be as simple as increasing pay to those who are underpaid, or standardizing wages across similar positions, then ensuring that your future compensation practices are fair and reasonable.

If you're concerned about an employee pay mistake, you can speak to a Rocket Lawyer On Call® attorney, or get help anywhere and on any device using the Rocket Lawyer Mobile App.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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