California Overpayment of Salary Laws

If an employer issues a paycheck for less than the amount earned, the employee is likely to notice and demand a corrected check. But what happens when the employer accidentally pays the employee too much in one pay period?

Everybody makes mistakes, and this includes California employers. In the case of an overpayment of wages, the employee is legally obligated to repay the amount in excess of what was owed, but employers have to be very careful about using self-help methods to reclaim the money. Yes, it would be easiest to just deduct the overpayment from the next paycheck, but in California, a unilateral decision by a private employer to deduct the overpayment from the employee's next check is illegal.

It's not hard to conceive of a scenario in which an employee's paycheck contains more money than is owed for their work that pay period. Maybe the employer counted on the employee to put in the same hours as they did each week for the last six months, but then, as it happened, they worked less. Maybe the accountant entered an incorrect number or confused the time sheets of two workers.

Whatever the cause, an accidental salary overpayment from an employer is not treated as a gift. There's no "finder's keepers" rule in employment law. Rather, whatever amount was paid in excess of the salary earned becomes a debt the employee owes the employer. But the employer cannot generally use their unique position to take back the employee's wages by self-help methods, like automatically deducting it from the next paycheck. California law forbids this tactic for any private employer.

California Labor Code Section 221 makes it absolutely clear that private employers are not allowed to make the unilateral decision to deduct salary overpayments from a worker's subsequent paychecks. The overpayment is a debt owed from the employee to the employer, but, absent consent from the worker, the employer can use only the same debt collection measures available to other debtors, like attaching the employee's salary. They cannot take advantage of their unique relationship to force immediate repayment from an employee. The rule was initially enacted to preclude kickbacks.

The California legislature has made one exception to this rule, found in Government Code Section 19838. It provides that the state, as an employer, does have the right to collect salary overpayments from the state employee's subsequent paycheck without seeking or getting the employee's consent. This right has not been extended to private employers.

A private employer cannot unilaterally decide to reclaim an overpayment by deducting the amount from the worker's next paycheck, but what if they get the employee's consent to the garnishment? If an employee gives their permission for the employer to collect the overpayment in this manner, it may be legal.

However, the law puts conditions on this type of arrangement. First, the employee's permission for deductions must be expressed in writing. Second, consent must be freely given, and the employee cannot be forced to agree to it. In fact, the employee can reconsider and withdraw consent whenever they want.

Finally, the employer cannot make any deduction before they have a signed consent agreement in hand. Even if all of those conditions are met, the employer must also make sure that the deductions do not drop the worker's salary below the minimum wage.

Most employees who are not white-collar workers are protected by California’s minimum wage laws. The minimum wage in California is listed as an hourly amount, but it also applies to workers who are paid a regular salary, calculated at the hourly minimum wage times the number of hours worked monthly. It is illegal in California for an employer to pay employees less than the minimum wage. If they do so, the employee can file a lawsuit against them.

In 2021, the minimum wage in California is $14.00 per hour for employers with over 25 employees, and $13.00 per hour for employers with 25 or fewer employees. This minimum wage is set to rise by $1 every year through 2023, when it will be $16 for employers with over 25 employees and $15 for employers with 25 or less. Note that in this state, cities and counties can set their own, higher minimum wage rates. For example, Los Angeles County set the minimum wage in 2021 at $15.00 per hour.

The rules about California minimum wage impact the rules for recovery of overpayment by deduction from subsequent paychecks. While deduction of the debt from a subsequent wage payment is permitted with the employee's freely-given written agreement, the employer must be sure that the paycheck provides the worker at least the minimum wage for each hour worked.

For example, an employee in Los Angeles in 2021 working full time should get at least $600 a week ($15.00 times 40 hours). Under state law, no wage deduction is permitted that drops the employee's salary below that amount. That means that it will be impossible for an employee to use deductions for overpaid wages with a minimum-wage employee.

The state of California has very strict rules about final paychecks. Under the Labor Code, when an employee is fired or quits with at least 72 hours notice, the employer must pay the entire amount due the employee on the date of departure. If an employee quits with less than 72 hours notice, the employer must pay on the last day of work everything the employee has earned within 72 hours of the date of departure. Failure to do so exposes the employer to significant fines and penalties, including one day's pay at the employee's normal daily wage for each day the worker must wait for their final wages.

How does this mesh with a voluntary agreement to deduct overpayments from a worker's paycheck? It doesn't mesh well at all since the two are incompatible. That is why employers cannot recoup their overpayment from an employee's last paycheck. If they do, they will incur the same per-day penalties as an employer who simply doesn't pay their employee on the date of departure.