When recovering overpayments, payroll officers should work with legal counsel to weigh the risk of noncompliance against the administrative burden of compliance, two payroll professionals said May 17.
“You cannot be 100 percent compliant. You just can’t do it, especially when it comes to overpayments. It’s very difficult,” said Barbara Youngman, CPP, senior payroll analyst at Toyota Motors North America.
Under the Fair Labor Standards Act, the federal requirements are clear, Youngman said. The employer must act in the way most beneficial to the employee. Any deduction to recover the overpayment must neither bring the employee’s pay to less than the minimum wage nor take away from overtime pay, Youngman said at the annual American Payroll Association Congress in Orlando, Fla.
State regulations are where overpayments get tricky, said Youngman, who is a member of the Bloomberg BNA Payroll Library advisory board.
Some states, such as Alabama and Georgia, do not directly address overpayments in their laws. Employers may be able to take more risks in such states, Youngman said. Employers have more leeway, but so do the states and the courts, should they get involved, she said.
In other cases, states decide how much notice employers must give an employee, whether the employee must provide written consent to the overpayment recovery, from what amounts the compensation may be deducted and how much may be deducted, Youngman said.
In Kansas, overpayments may not be recovered faster than they were issued, Youngman said. Employers that overpaid an employee for six months cannot recover those payments in less than six months, she said.
In Maine, an employer may only deduct from an employee’s wages to recover an overpayment, Youngman said. The employer may deduct no more than 10 percent of an employee’s net pay without permission, she said. Calculating deductions from net pay may be complicated because payroll systems do not look at net pay, she said.
Such regulations may make compliance difficult. “It’s not just a payroll issue. It’s not just an HR issue. It is a legal issue, so work with your counsel,” Youngman said. “That’s one of the first things I do when I go into an organization now, I find out who my employment attorneys are.”
Recovering overpayments has federal tax ramifications for the employee and employer, said LaTisha O’Neal, CPP, payroll supervisor at Bama Companies Inc.
Depending on when the overpayment was made, discovered and recovered, several corrections must be sent to the Internal Revenue Service, O’Neal said.
Recovering an overpayment made during the previous tax year involves collecting the gross payment from the employee, correcting quarterly returns to recover social security and Medicare taxes and filing a corrected Form W-2, Wage and Tax Statement, she said.
O’Neal said she has received push back from legal counsel on the tax procedures for recovering overpayments, as Youngman had.
“You’ve got to make that choice,” O’Neal said. “Are you going to fall on that sword? Or are you going to go with that legal counsel?”
“I don’t have a law degree, and I’m not the person who’s going to have to go to court to defend that, so if my legal counsel says, ‘This is the way you’re doing it,’ I get documentation,” O’Neal said.
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