Practice Areas

How to Recoup Overpaid Wages from Employees

Many employers logically assume that if they overpay an employee, they should be able to recoup that overpayment by simply adjusting an employee’s future paychecks.  While that’s the case under the federal Fair Labor Standards Act (FLSA), it’s not always the case under state law.

Many states have statutes or regulations that permit recoupment under certain conditions, while other states have statutes or regulations that flat out prohibit recoupment through paycheck deductions.  In this post, we address New York state law for employers looking recoup wage overpayments.

Recoupment Allowed Only Under Certain Circumstances

Under New York law, in order for an employer to recover an overpayment made to an employee by way of payroll deduction, the overpayment must be the result of a mathematical or clerical error.  Further, the law permits employers to recoup such overpayments only under the following conditions:

  • Employers may only recover overpayments made in the 8 weeks prior to the issuance of a Notice of Intent, described below, but may make deductions to recover overpayments for a period of 6 years from the date of the original overpayment.
  • Employers are limited to one deduction per wage payment to recover an overpayment.
  • If the overpayment is less than or equal to the net wages in the next wage payment, the entire amount may be deducted; otherwise, the overpayment deduction is limited to 12.5% of the employee’s gross wages, so long as the deduction does not reduce the employee’s wages below the New York state minimum wage (currently, $8.00/hour).
  • Employers must provide affected employees with a Notice of Intent in order to commence making deductions to recoup the overpayment.  If an employer will be recouping the entire overpayment in the next wage payment, the notice must be provided at least 3 days before making the deduction.  In all other cases, the notice must be provided at least 3 weeks before the deductions may commence.
  • The Notice of Intent must contain: (1) the amount overpaid in total; (2) the amount overpaid per pay period; (3) the total amount to be deducted; and (4) the date of each intended deduction together with the amount of each anticipated deduction.  The notice must also inform the employee of his/her right to contest the overpayment, provide the date by which the employee must contest the overpayment, and include the procedure for the employee to contest the overpayment and/or terms of recovery.

Employers Must Establish a Specific Procedure for Challenging Any Planned Recoupment

New York Labor Law is specific as to what the procedure must entail.  The procedure must:

  • Provide an employee with 1 week from the date of receipt of the Notice of Intent to challenge the proposed deduction(s).
  • Require an employer to respond to the employee within 1 week of receipt of the employee’s response.  The employer’s response must address the issues raised by the employee and contain a clear statement indicating the employer’s position regarding the overpayment (specifically, whether or not the employer agrees with the employee’s position, together with a reason why the employer agrees or disagrees).
  • Provide the employee written notice of the opportunity to meet with the employer within 1 week of receiving the employer’s response to discuss any disagreements that may remain regarding the anticipated deductions.
  • Require the employer to provide the employee with written notice of the employer’s final determination regarding the deductions within 1 week of this meeting.  In making a final determination, the employer must consider the agreed-upon wage rate paid to the employee and whether the overpayment appeared to the employee to be a new agreed-upon rate of pay.  Further, when making a final determination regarding the amount of the deduction to be made per pay period and the date such deduction(s) will commence, the employer must also consider the issues raised in the employee’s request regarding the amount of each deduction.

Where employees avail themselves of this procedure, employers must wait at least 3 weeks after issuing the final determination before commencing deductions.

The procedure is slightly different where the entire overpayment may be recouped in the next wage payment after the overpayment.  In those cases, the employee must challenge the proposed deduction within 2 days of receipt of the Notice of Intent.  Should the employee challenge the proposed deduction, the employer must postpone the deduction and fully follow procedures outlined above.

The same parameters apply to employers looking to recoup an overpayment, not from a future payroll deduction, but from a separate transaction.  In other words, employers cannot circumvent the law’s requirements by simply requiring an employee to pay the employer back by writing a check for the overpayment.

Employers who fail to follow the parameters outlined above create the presumption that the contested deduction was impermissible and in violation of the New York Labor Law.