Q. Due to an error by our payroll administrator, we inadvertently overpaid an employee for five pay periods, by a total of over $2,000. We believe the employee realized our mistake but decided to cash her checks anyway, without saying anything to us. Are we legally allowed to recoup the entire amount from the employee, even though it took us several months to discover the overpayment?
A. You are entitled to recoup all overpayments of wages, as long as you can clearly show that your employee received more than she was due under your wage agreement. However, to avoid running afoul of wage laws, be careful about how you get the money back.
Your safest bet is not to deduct money from the employee´s future paychecks, but instead to notify her of the overpayment and work out a mutually agreeable repayment plan under which she makes direct payments to your company.
The Oregon statute that allows certain lawful deductions from wages, ORS 652.610, does not specifically address the issue of wage overpayments. In the past, the Bureau of Labor and Industries viewed overpayments as a form of payment in advance and didn´t consider adjustments on future paychecks to be "deductions" that would violate this law.
However, in 1997, a federal court decided in the case of Duncan v. Office Depot that withholding money from an employee´s check to recoup an overpayment was an illegal deduction under the Oregon statute.
In that case, the employer overpaid the employee, Kevin Duncan, by nearly $5,000 over a period of months. After discovering the mistake, the employer wrote a letter advising Duncan of its intention to recoup the money through weekly payroll deductions and asked him to sign the letter. Duncan did sign the letter, but indicated that it was "under protest." After one deduction was made, Duncan resigned.
The federal court determined that the employer was entitled to return of the overpayment, but that its method of recouping the money constituted an illegal deduction.
Even though the court ruled such deductions are illegal, the policy of the Bureau´s Wage and Hour Division is not to pursue employee wage claims when an employer has a valid counterclaim against the employee. So assuming that there is no dispute that your employee was overpaid, the Bureau would not investigate the employee´s claim.
Of course, this wouldn´t prevent her from taking private action and seeking penalties in a lawsuit in court. That´s why a payment plan that doesn´t involve the paycheck is your wisest option.
And what if the employee won´t agree to the repay the money? Hopefully, it won´t come to that, but your company can take disciplinary measures when it´s clear the employee isn´t entitled to the extra wages. You can also sue the employee in small claims court and obtain a judgment against her. And even if she goes to work for another company, you can enforce the judgment by garnishing her wages.
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