How Organizations Can Fix Overpaying an Employee
Overpaying employees happens more often than it might seem. And while it isn’t the end of the world, letting an error go uncorrected can cause problems for organizations down the road. From why it happens to common solutions organizations use, find out what you need to know about correcting a payroll overpayment.
Common Reasons Why Employees Are Accidentally Overpaid
Companies accidentally overpay employees with relative frequency. Consider two reasons why a team member may end up with higher wages on a paycheck:
1. Convoluted Pay Scales
In many instances, employees are overpaid because the organization’s pay structure is just too complex for its own good. Sometimes, this might be the result of overthinking how the organization approaches paying its staff.
Similarly, complicated compensation structures mean you could end up with an entire department getting paid incorrectly or at least being paid incorrectly relatively frequently. For sales-focused teams, it’s all too common for an employee to be paid a commission that they didn’t actually earn. Or for a commission to go to the wrong person.
2. Forgotten Clockouts
Another common way to accidentally overpay an employee is when a nonexempt team member forgets to clock out. For example, an employee might forget to clock out on Friday, and even though they technically worked less than 40 hours, their timecard says otherwise. They end up with six hours of overtime pay.
Many organizations likely have check-ins in place to ensure that honest mistakes like these are caught and fixed before time cards go to payroll—including time & attendance software that’s bundled or built into an HRIS. However, not everything is caught by managers every time, resulting in higher pay than promised.
Each of these issues is totally normal. And while HR professionals want to avoid them as best they can, sometimes it’s not possible.
How Do I Correct an Overpaid Employee?
Employers can approach overpaying employees in four different ways. Each includes pros and cons that can impact the organization’s finances and employee satisfaction, though depending on the industry, some solutions are more preferable to others.
Four ways to correct overpaying an employee include:
1. Take it Out of the Employee’s Next Paycheck
One approach organizations use is to send an email to the employees who were overpaid to let them know what happened. In that same message, the HR professional will also share that the amount overpaid will be taken out of the person’s next paycheck.
Two factors HR should consider with this tact:
- First, companies need to make sure that they can legally do this in their state before they move forward with reclaiming overpaid wages.
- Second, this approach can actually put your employees in a difficult financial spot, especially if they didn’t catch the overpayment themselves. For example, it’s possible the employee already spent the money on rent, groceries, or another important bill. Immediately recovering the funds would not only upset them but also could add unneeded stress that hurts their productivity and damages the employment relationship.
2. Don’t Do Anything
Some organizations decide that the mistake of overpaying employees is preferable to reclaiming the pay, so they decide to just move on as if nothing happened. For example, this exact situation happened to the Parks Department in Nashville.
More than 100 employees were incorrectly paid a combined total of $270,000 after a mistake was made calculating COVID-19 hazard pay. Initially, the employees were told that they’d have to pay back the money they didn’t actually earn. However, news outlets picked up the story and it became a public relations headache for the City of Nashville. The local government decided to cut its losses and employees weren’t required to repay the funds after all.
The problem with this solution? It isn’t particularly fair to the other employees who don’t get paid extra.
3. Overpay Everyone
Other companies decide that the only fair approach to accidental employee overpayment is to overpay the rest of their employees—essentially a one-time bonus.
This approach may seem like the most appropriate solution if HR wants to ensure that employees feel they’re receiving equal treatment. However, it isn’t realistic for many organizations to financially plan for issuing one-time bonuses to the entire staff every time someone is accidentally overpaid.
4. Work with the Employee to Overpay it Over Time
A final solution—one that BerniePortal uses—is to work with employees to correct the mistake over time. This is an effective approach because extra wages aren’t taken back all at once, which helps ensure that the overpaid employee can cover their expenses if they already spent some of the extra funds in their paycheck on bills, rent, or something else important.
Instead, HR and employees collaborate. They agree on a fair amount that’s subtracted from subsequent paychecks until the mistaken wages are paid back in full. Some employees may want to make up the difference as soon as they can and others may need a little more time. Regardless, HR should be flexible and understanding—employees will remember it in the long run.
Template: How to Let an Employee Know They’ve Been Overpaid
Communication is key, no matter how you decide to take on fixing an overpayment. When you’ve discovered an accidental overpayment, use the following template to let employees know what happened and how it will be adjusted in the future:
Hi [team member],
As promised, I’m following up on the conversation you had in your 1:1 earlier today.
We were auditing payrolls from earlier this year, and it turns out that the company overpaid you by [amount] in [month]. [One-sentence explanation of what happened]. HR doesn’t often make payroll mistakes, but unfortunately, they happen sometimes.
The company needs to correct that overpayment, but I’ll work with you to come up with a plan that makes sense, including timing it in a way that doesn’t create an undue burden for you. And I’ll also be available to answer any questions that you have.
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