Question

My company recently discovered that it had overpaid an employee by more than $2,000. We’ve informed her of the mistake, but now that we’re discussing a repayment plan, she’s becoming evasive. Is there anything we can do legally?

Answer

The employee’s refusal to formally acknowledge the debt may complicate matters. Either way, proceed carefully and document every step.

Understanding the Legal Framework

This situation is covered in an Advisory issued by the Massachusetts Attorney General’s Fair Labor Division (FLD), titled “About the Parameters for the Recoupment of Inadvertent Wage Overpayments.”

According to the Advisory, there are two threshold concerns employers must consider:

1. If there is any question about the existence of the overpayment or the amount owed, that overpayment cannot be recovered through a wage deduction.
2. If the overpayment is undisputed, any repayment plan must be fair and reasonable under the circumstances.

Massachusetts wage and hour laws are some of the most strictly enforced in the country. They’re designed to ensure that employees are paid on time and in full for all wages earned. As a result, if you’re seeking to recover wages paid in error, you bear the burden of proving the overpayment. And even if you can prove it, there are limits on when and how you can pursue repayment. The Advisory also warns that employers may not rely on defenses not explicitly laid out in the statute, especially if those arguments conflict with the intent of the Wage Act to protect employees.

When Recoupment Is Permitted

Employers may legally make a valid setoff in certain situations, such as when an employee owes a clear and undisputed debt, such as a loan or a wage advance.

This type of repayment must be:

• Based on a voluntary agreement between the employer and employee, or
• It is determined through an independent process, like a court ruling, that protects the employee’s right to challenge the debt.

Overpayments from Honest Mistakes

In cases when an overpayment results from a simple employer error, it is often treated similarly to a wage advance. This means it may be subject to recovery, but not without restrictions.

According to the Attorney General’s Advisory:

• Wage recoupment cannot reduce a worker’s pay below the state minimum wage ($15/hour).
• No deductions may be taken from the wages of minimum wage workers.

Fairness Still Applies

Even when the overpayment is acknowledged, any effort to recover those funds must be grounded in fairness.

The Advisory references a 2011 workers’ compensation case in which a judge ruled that repayment is discretionary. That means a judge could order full repayment, partial repayment, or none at all.

The court emphasized a test of fundamental fairness, taking into account:

• The degree of fault on both the employee and employer’s part,
• The employee’s ability to repay,
• The hardship the repayment may cause, and
• The total amount of the overpayment.

Best Practices for Recoupment

If the employee acknowledges and agrees to repay the overpayment, the process is straightforward. Start by having a transparent conversation to ensure the employee understands what happened and what the repayment will involve.

From there, the employer may proceed with a repayment plan with a few important limitations. The setoff must not exceed 15% of the employee’s gross wages or 50 times the minimum wage in any given pay period. Additionally, the repayment deductions may not reduce the employee’s pay below the state minimum wage for any hours worked.

Once terms are agreed upon, it’s essential to document the plan in writing. The employer and employee should sign off to ensure clarity and protect both parties moving forward.

When There’s a Dispute

Things get more complicated when the employee disputes the overpayment or questions the amount owed. In these cases, wage deductions are off the table, and the employer may  not unilaterally recover the funds.

Instead, repayment must be pursued through legal channels, usually by filing a claim in Small Claims Court. Most wage disputes of this kind fall below the $7,000 limit for Small Claims, making it the most accessible option.

Before proceeding, it’s worth considering whether it’s the right move. Legal proceedings take time and resources, and the decision to proceed may depend on factors like whether the employee is still with the company, their role, and how significant the overpayment was.

Conclusion

Overpaying an employee can be a sensitive and legally complex situation. Taking the proper steps, communicating, following wage laws, and ensuring fairness can help resolve the issue without escalating it. When in doubt, it’s always best to seek guidance to protect your organization and employees.

AIM members may contact the AIM HR Helpline by calling 1-800-470-6277 or emailing helpline@aimnet.org for expert guidance and practical advice.