How to Handle Overpayment of Wages

We have received some questions on the HR Hotline recently asking what an employer can do when an employee owes them money. One employer asked, “I just realized that we overpaid an employee on a paycheck last month, can I automatically deduct it from this week’s paycheck?” Or “We advanced an employee a week of vacation and now they have resigned, how do I get it back?”

This can be a tricky issue for employers because in California, an employer cannot use self-help remedies to recoup what an employee owes them. In other words, you cannot take advantage of your status as the employer and automatically deduct what is owed from an employee’s paycheck.

When an employee is advanced wages or if they are overpaid and you want to take a deduction from their paycheck, the key is to ensure you have a voluntary agreement in writing with the employee before any deductions are taken.

For example, if you overpaid the employee, explain the mistake and communicate that the employee is not entitled to the money. Request that the employee voluntarily pay you back (such as by mailing a check or via payroll deductions). Sometimes, the employee may have already spent the funds and does not have enough money to pay you right away. Try to work with the employee to come up with a written plan.

Another option is to propose a voluntary agreement where the employee pays back the money via payroll deductions. An opinion letter from the Labor Commissioner provides guidance for employers regarding money owed by an employee. It states, "DLSE vigorously enforces the law with respect to unlawful deductions. If an employer deducts any portion of an employee's paycheck because the employer previously overpaid the employee, DLSE would view the deduction as unlawful. DLSE would not, however, view the deduction unlawful if the employer and employee have previously entered into a written agreement allowing for deductions based on the voluntary consent of the employee."

You can access the full Labor Commissioner Opinion Letter here.

This means that an employer may lawfully have an agreement in writing with an employee that specifies amounts loaned or advanced to the employee can be repaid in installments via payroll deductions.

However, should the employee quit or be terminated before the loan or advance is fully repaid, the employer may not deduct the entire outstanding balance from the employee’s final paycheck. (Note: An employer is only permitted to deduct one installment on the final paycheck.)

So what do you do if an employee doesn’t agree to voluntary repayment? Then, the employer’s recourse would be to pursue the debts owed in court, as any other creditor, and may also pursue disciplinary action.

Employers should proceed with caution when advancing wages or vacation time, with the understanding that your options for repayment are limited. If you do advance wages, ensure the terms are covered by a contractual agreement and signed by all parties before any loan is granted to an employee.

If you find yourself dealing with a tricky employment situation, give us a call! CEA members have unlimited calls with our HR experts, so give us a call at 800.399.5331, Monday through Friday, 8am-5pm. We love to hear from you!