Legal Rights of an Employer Overpaying an Employee

Employers sometimes make errors when processing payroll. Unlike when playing Monopoly, you don't get to keep the excess money if an employer makes a payroll error in your favor. You must report it to your employer and make arrangements to pay it back. Employers in both America and the United Kingdom have the right to collect overpayments, although it is more difficult to do so in America.

Tax Law

Federal law treats overpayments as wages until they are repaid. Thus, if an employer overpays an employee in December and she does not reimburse him until January, the employer must report the overpayment as part of the employee's wages and the employee must pay taxes on it. However, if the employee repays the employer in the same tax year as she receives overpayment, the employer does not report the overpayment as wages.

Right to Collect

Employers have the right to collect overpayments from employees. If an employee refuses to repay an employer, the employer has the right to bill the employee for the overpayment and treat it as an unpaid debt. Thus, the employer can sue the employee for the unpaid debt if the employee refuses to pay it back. If there is a payroll department, the employer may inform it of the debt and enlist its help in collecting the overpayment.

Deduction of Overpayment

State laws vary regarding whether an employer can deduct overpayments. In general, the employee must agree in writing to the wage deduction. Submitting a time sheet does not usually qualify as written authorization unless the time sheet specifically says that the employee understands his employer may deduct wages to correct errors. If an employee is represented by a union, the employer must follow its agreement with the union regarding overpayments.

British Law

The United Kingdom differs substantially from America regarding overpayment. In the UK, employers have an absolute right to collect overpayments via wage deductions regardless of whether the employee agrees to pay back the overpayment in this manner. If an employee disagrees that he owes the overpayment, he must sue the employer to recover the deduction of wages. British employees must prove they were unaware they were being overpaid to stop an employer from deducting overpayments from their wages.

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