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How To Recoup Funds When You Overpay Employees

Although some payroll systems rely on specialized software to perform automated calculations electronically, the majority of them still depend on human input and review. Instances of this include employees manually entering hours on timesheets, human resources or payroll processors performing data entry, and manual reviews of calculations to ensure accuracy.

Regrettably, errors can occur when humans handle payroll, leading to incorrect pay for employees. In the case of an insufficient paycheck, there are a couple of solutions depending on the internal practices of the department. The payroll team can either calculate the correct amount and pay the difference, or void the original paycheck and issue a new one with the correct amount. However, correcting overpayments may not always be as straightforward.

Overpayment Discovered Before Being Received by the Employee:

The timing of discovering an overpayment error can complicate matters. Best case, the error is identified prior to the issuance of the check or direct deposit to the employee. In this case, the original transaction may be voided and reprocessed for the correct amount. However it is advisable to check with your service service provider to ensure payment can be corrected if the original data has been submitted to the bank. In the event the payment is already en route to the employee, it may be necessary to initiate a stop payment or recall of the direct deposit transaction. Providing advance notice to the affected employee that a correction will be made can be helpful to avoid them cashing or depositing the check, and to prevent them from being caught off guard if the direct deposit is reversed from their account.  There are policies set by banks that will need to be followed in order to reverse a direct deposit, check with your service provider for these policies.

Overpayment Discovered After Being Received by the Employee:

Effective communication becomes crucial in such situations the payment is already received when the error is discovered. In this case, the situation becomes much more tricky.  If there is a positive rapport with the employee, he or she may agree to repay the net amount to the company, or have their next paycheck short paid. However, an uncooperative employee can make the situation more challenging. They may have already cashed the check or withdrawn the deposited funds. Recovering these funds can be difficult or even impossible.

In such instances, the company may have the option of reducing the employee’s pay on future pay dates to recover the overpaid amount. However, regulations and guidelines may differ by state, and the employer may have to adhere to deduction limits or time constraints for making corrections. This may result in the employer having no recourse if the error is not identified and rectified within the specified timeframe. Direct deposits are not always able to be reversed, there are policies set by banks that will need to be followed. Even if these policies are followed, the account being reversed has to have funds available. If there are no funds in the account the reversal will not work.

Bottom Line:

After making the necessary corrections, it may be advantageous to determine the reason(s) for original error and establish new procedures to avoid its recurrence. Opting for an electronic solution and collaborating with a payroll service provider are two of the most effective methods to minimize errors.

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Written by Tessa Braybrook

Tessa joined Superior Trucking Payroll Service in September 2022. She loves to write and make videos which made her a great asset to the team in her marketing position. 

Before working at Superior Trucking Payroll Service she worked in IT at GVSU which gave her the skills to problem-solve with customers over the phone. 

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