Template: How to Correct and Communicate a Payroll Overpayment

Overpaying employees more common than you might think. But that doesn't mean it should go uncorrected. Here's what HR pros need to know about why overpayment happens and how to fix it, including a communication template.

Why Accidental Overpayment Is So Common

Accidental overpayment is common for two major reasons:

1. Convoluted Pay Scales

Workers are often overpaid because the organization’s pay structure is too convoluted.

Complicated compensation structures can result in a whole team getting paid incorrectly on occasion. For example, it's all too common for salespersons to be paid a commission that they didn’t actually earn or for the right commission amount to go to the wrong person.

Compensation transparency can help your organization stay consistent—and build culture, too—by setting expectations for how roles are compensated and how raises and commissions are awarded.

Consider the target compensation approach. Target comp describes the total pay an employee can earn in a given role. It includes the base salary for the position as well as additional forms of compensation, including variable or incentive-based pay, such as bonuses, success shares, commissions, and more. Target comp can improve recruiting, retention rates, and financial planning. 

2. Forgotten Clock Outs

Another common reason for overpayment is time clock mistakes, especially when a nonexempt team member forgets to clock out. For example, if an employee forgets to clock out on Friday, their timecard may reflect over 40 hours of work for the week, which would lead to overtime pay at 1.5 times their regular rate.

Organizations should have physical or digital check-in locations to make sure that honest mistakes like these are corrected before going to payroll. This may include time & attendance software that’s bundled with or built into an all-in-one HRIS like BerniePortal. Still, these mistakes can occasionally slip through to payroll, resulting in a larger paycheck than the employee earned.

How Do I Correct an Overpaid Employee?

While these overpayment mistakes are not uncommon, HR and employers should try to avoid them as much as possible. However, when it's not possible, you can correct overpaying employees in four different ways.

Employers should note that—under the Fair Labor Standards Act (FLSA)—the US Department of Labor does permit employers to recoup the amount of wages inadvertently overpaid to employees, but many states regulate how employers may go about it, including whether or not employees must be notified or even give their consent.

Keep this in mind when considering the following approaches to correcting overpayment:

1. Take the Overpayment Amount Out of the Employee’s Next Paycheck

One of the simplest approaches to overpayment is taking the amount overpaid out of the employee's next paycheck. If you choose this approach, be sure to communicate clearly with the employees who were overpaid to let them know what happened and how it will be corrected.

This correction may make the most sense to employers, but it's important to consider how it affects employees. For example, recoupment on the next paycheck can put an employee in a difficult financial position—especially if they didn't notice the overpayment and already spent the money on rent or mortgage payments, utility bills, or groceries. Immediate recovery could add unnecessary financial stress, hurting their productivity and your relationship.

2. Don’t Do Anything

Some organizations decide that the occasional loss due to overpayment is preferable to the possible fallout of reclamation, so they decide to just move on as if nothing happened.

Consider, for example, what happened when the Metro Nashville Parks Department mistakenly gave COVID hazard pay to over 100 employees and tried to recover the $267,000 overpayment. Once the story made the news, it became such a public relations problem that the city government decided to cut its losses and forego repayment.

Of course, this solution presents its own problems—particularly as it's unfair to the employer and to the employees who didn't receive any extra pay in the first place.

3. Overpay Everyone

Some organizations have come to the conclusion that the only fair approach to accidental overpayment is to overpay the rest of their employees, too—essentially treating it as a one-time bonus. 

If fairness is an overriding concern for HR, this approach may seem like the most appropriate solution.

But it isn't realistic as a consistent response. Most organizations can't afford to issue one-time bonuses to the entire staff every time someone is accidentally overpaid. 

4. Work with the Employee to Overpay it Over Time

Finally, one fair and compassionate solution is working with employees to correct the payroll mistake over time. This is an effective and sustainable approach because overpaid wages aren’t taken back all at once, allowing the overpaid employee time to cover expenses for extra funds already spent.

This is an opportunity for HR and employees collaborate. They agree on a fair amount to be subtracted from subsequent paychecks until the overpaid wages are paid back in full. Some employees may want to make up the difference as soon as they can while 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 Inform an Employee That They’ve Been Overpaid

No matter how you decide to correct an overpayment, communication is key. Whenever you discover an accidental overpayment, use the following template to let employees know what happened and how it will be corrected:

Hi [team member], 

As promised, I’m following up on the conversation you had in your weekly 1:1 meeting.

We were auditing payrolls from earlier this year, and it turns out that the company overpaid you by [amount] in [pay period]. [One-sentence explanation of what happened]. HR doesn’t often make payroll mistakes, but unfortunately, they still happen sometimes. 

The company needs to correct that overpayment, but I want to work with you to come up with a plan that makes sense, including spreading it out in a way that doesn’t create an undue burden for you. I'd like to meet this week if possible.

Would [meeting day] at [meeting time] work for you?

Thanks,

[name]

Additional Resources

You can stay informed, educated, and up-to-date with important HR topics using BerniePortal’s comprehensive resources:

• BerniePortal Blog—a one-stop-shop for HR industry news
• HR Glossary—featuring the most common HR terms, acronyms, and compliance
• HR Guides—essential pillars, covering an extensive list of comprehensive HR topics
• BernieU—free online HR courses, approved for SHRM and HRCI recertification credit
• HR Party of One—our popular YouTube series and podcast, covering emerging HR trends and enduring HR topics