Overpaid employees—guidance for future wage deductions

Before you consider reducing wages on future payrolls, the amount you want to deduct should be:

• A result of an accidental overpayment (ex. a mathematical or clerical error), and;
• There cannot be any dispute over whether the employee is actually owed those wages, and;
• Compliant—learn more about staying compliant in the dropdown below.

Reduce gross wages during the payroll run

1. Click the Pay section and click Run Payroll.
2. Click Run payroll.
3. Edit the hours worked in the “Regular hours” column to adjust the total wages in the “Gross Pay” column.
   • You may be able to edit the gross pay directly, it depends on how an individual's compensation was set up.
4. Add a personal note to the employee's paystub explaining how you got their total pay. If you do not, the employee could file a wage complaint against your company.
   • Include these details in the note:
     • The pay period(s) when they were overpaid
     • How much their pay is being reduced this time

As with many laws affecting employees, if state law provides greater employee protections than federal law, the employer must comply with state law.

• Federal law
  • Under federal law, employers can make paycheck deductions if there was an accidental overpayment because they consider those overpayments to be in the same category as wage advances. 
    • This also means that employers need not stay above the minimum wage when making deductions from future paychecks to correct previous overpayments.
• State law
  • Varies significantly by state. 
    • We urge you to check with your state’s employment agency to confirm that this type of wage deduction is allowed and if there are any relevant restrictions or guidelines.

Considerations to make before deducting overpaid wages from subsequent paychecks:

• Consent from the employee 
  • Many states that allow employers to deduct overpaid wages from subsequent paychecks require employers to get the signed, written consent of the employee before making the deduction. Even if a state does not explicitly require prior consent, there may be a notification process to inform the employee of the wage deduction. Because of this, we strongly recommend you have some sort of written agreement signed by your employee detailing the amount to be deducted and which paycheck(s) it will come from.
• Minimum wage considerations 
  • Some states require the employee’s take-home pay to be at least minimum wage. This means an employer cannot make a deduction that puts the employee’s wages below the applicable minimum wage.
• Timing
  • Certain states put limits on the amount of time between when an employee was overpaid and when the subsequent paycheck deduction can be made. Generally, employers should not deduct overpaid amounts from paychecks if 90 days have passed since the employee was overpaid.
• Amount
  • Some states limit the amount that can be deducted from the employee’s wages in case of an overpayment. This amount might be a set number or a percent of the employee’s normal wages that can be deducted. If the overpayment amount is particularly high, and you cannot cancel the payment, it might be worth working out a separate arrangement with the employee to get the overpaid money back.
• Final paycheck
  • There are several states that prohibit employers from deducting overpaid wages from an employee’s final paycheck. 
• Pay stub or pay statement rules
  • Employers are required to explain how they arrived at an employee's total pay—this is what a paystub is for. If you do not, the employee could file a wage complaint against your company.
  • In Gusto, you can add a personal note to the paystub. We always recommend including:
    • The pay period(s) when they were overpaid
    • How much their pay is being reduced this time