Minimizing liability for overpayment, underpayment of wages

Overpayment of wages is more common than you may think. For example, inadvertent overpayment may occur in the context of processing new hire, promotion or revised benefit election paperwork. Regardless of the reason, employers must address overpayment in a very specific manner.

The federal Fair Labor Standards Act does not address the actual payment of wages. This topic is generally regulated at the state level. The Oklahoma Department of Labor (ODOL) has promulgated a specific regulation instructing employers how to proceed in the event of wage overpayment. Okla. Admin. Code 380:30-1-11.

Recouping overpayments

When an Oklahoma employee has been overpaid, the employer has two options to recover or recoup the amount overpaid. The employer may request a lump sum cash repayment from the employer, i.e., the overpaid employee writes a check to the employer for an amount equal to the overpayment received. Alternatively, the employer and the overpaid employee can enter into a payroll deduction agreement to either deduct the entire lump sum or deduct the amount owed in installments. The employer cannot require the overpaid employee to select a particular option. The employee may choose the option he prefers, and his choice must be made in writing. (An email is sufficient.) In reality, the amount of the overpayment and the employee’s ability to repay that amount typically dictates the option chosen. If the employer agrees, the employee may provide reimbursement through a combination of direct repayment and deducted installments.

The regulation further provides that the installment term cannot “exceed the length of the term in which the erroneous payments were made.” If the amount of the overpayment was substantial, and was erroneously paid on only one occasion or over only a short term, you are strongly recommended to contact counsel to discuss potential approaches to recoupment.

In the event that the employee’s employment terminates prior to full recoupment, the remaining balance may be considered an offset to final wages due. In the event that the employer is unable to deduct the entire balance due and owing from a final paycheck, the employer is not left without a remedy. The employer can file suit to recover the remaining amounts owed. This can usually be done by filing of a lawsuit in an Oklahoma small claims court.

There are some limitations. As with any wage deduction, the employer is limited in the amount it can deduct from each paycheck. The deduction cannot have the effect of rendering the employee’s hourly rate below applicable minimum wage and/or overtime requirements. This principle applies even when deducting wages from an employee’s final paycheck.

In addition, the rules regarding payroll deduction agreements apply. Under Oklahoma law, a payroll deduction agreement must be in writing and signed by the employee before any deduction is made. In the context of repayment through installments, the written deduction agreement must also include repayment terms, including the duration of installment payments and the amount of each installment payment. For this reason, even if an employer has a payroll deduction agreement on file for the overpaid employee, that agreement may not contain sufficient information for purposes of recoupment.

Keep in mind that these procedures apply to the overpayment of “wages,” which are defined by the Oklahoma Protection of Labor Act to include “salaries, commissions, holiday and vacation pay, overtime pay, severance or dismissal pay, bonuses and other similar advantages agreed upon between the employer and the employee, which are earned and due, or provided by the employer to his employees in an established policy, whether the amount is determined on a time, task, piece, commission or other basis of calculation.”

Correcting underpayments of wages

There is no similar specific regulation addressing an employer’s obligations in the event of underpayment of “wages.” It is important to take quick remedial action. Under Oklahoma law, an interval of not more than 14 calendar days may elapse between the end of a pay period worked and the regular payday designated by the employer. In other words, employees are entitled to receive their wages for a particular workweek no later than 14 calendar days after the conclusion of that workweek. An underpaid employee can claim a violation of this law in the event that she does not receive supplemental payment within 14 calendar days from the conclusion of the particular workweek at issue.

Employers should make every effort to correct underpayment within this 14-day window, although this may not be possible depending on the amount of time that passes before the underpayment is noticed or reported.

Best practices

Be sure to document the circumstances surrounding overpayment or underpayment of wages. Record the events that led to the error, the manner in which you received notice of the error, and all of the steps taken to correct it. A written policy requiring employees to check their paystubs and immediately report errors in payment can be valuable in these circumstances.