Under paying and overpaying employees seems like an easy problem to avoid. But it’s a serious challenge that plagues small and medium-sized businesses alike. In 2019 alone, the DOL collected over $320 million in back wages for employees. With more crackdown and higher penalties, businesses need to be more prepared than ever before.
What Should You Do If You Overpay an Employee?
Let’s start with the basics: According to the Fair Labor Standards Act (FLSA), employers that make a one-time overpayment to an employee can recoup the overpayment by deducting that amount from the employee’s next paycheck. (Keep in mind state regulations can differ.) But don’t go rouge. Keep your employees informed by following these 4 steps:
Determine how much you overpaid the employee during the pay period.
Contact the employee you overpaid and breakdown the situation (no need to panic)
Inform them you plan to deduct the overpayment out of their next paycheck
Ask them if this will cause a financial burden (remember, when an employee receives extramoney–whether they notice it or not–they may spend it right away). If yes, try to arrange installments that you both agree on. This will hopefully reduce the changes of resentment. If no, simply make the deduction.
What You Should Do If You Underpay an Employee?
Underpayments happen for many reasons, but none more than human error. If you’re lucky and you’ve found the error before the Wage & Hour division, here’s what you should do.
Calculate how much the employee was underpaid
Inform the employee of the mistake and the next course of action (repayment)
Remedy the situation by including the missed wages in their next paycheck
Get the employee to sign an acknowledgement that the error was fixed
Keep in mind, the statute of limitations on underpayment is two years, or three in the event that the underpayment was deliberate.
How do I avoid incorrectly paying employees?
Because the number one reason for overpayment or underpayment is human error, you should consider automating your payroll process if you haven’t already. You should also remain up-to-date with best practices by subscribing to email newsletters of government departments like the DOL and Wage & Hour division.
With PayNortheast Payroll, you can ensure your employees are always paid accurately and on-time.
Quick note: This is not to be taken as legal advice. Speak with health and legal professional before implementing guidelines for your company.