Wage & Hour Law: What if you have been paying and employee too much

07/31/07

Question: We hired an employee at $30,000 per year. At her yearly review we discovered that she has inadvertently been paid $35,000 per year. At that point, we reduced her pay to $30,000. She thinks that's illegal. Is it? Answer: You are well within your rights to scale her salary back to $30,000/year. Since this was the offer that she accepted upon hire, she is not due an additional $5,000 per year simply because of an accounting/payroll error. In fact, you have the right to recover the overpayment from her!

Of course, this would probably present a hardship for her, so consider a few different options:

Forgive the debt. If she is an employee in good standing, and someone you would like to retain, correct her salary and forgive the debt.

Cut the debt in half. The company can bear some responsibility for the error, while also placing some of the responsibility on her. Explain to her that although the company did err in overpaying her, this does not entitle her to keep the overpayment. Tell her you are, however, willing to cut the debt in half (to $2,500). This would be a show of good faith on your part, while enabling your company to recover some of the money. If you choose this option, we recommend that you negotiate a mutually satisfactory long-term repayment schedule with her.

Have her repay the debt in full. Work out a repayment schedule with her (perhaps over a period of a year) for the entire amount of overpayment. Be sure she is earning at least minimum wage after the deductions for repayment are made. There is always the risk, however, that this will present such a hardship on her that she may begin looking for new employment.

If any of these scenarios, please note that if you choose to recover any overpayment from her and correct her salary to $30,000, you should review her for a raise at annual review time in accordance with company policy.

The following products can answer these kinds of questions for you; you might want one or both on your bookshelf:
State and Federal Employment Law Manuals
The Employer's Legal Handbook.