Imagine an employer’s payroll service hits the wrong button and accidentally doubles an employee’s wages.  The payroll service tells the employer that it made a mistake.  The employer tells the payroll service to take the extra pay out of the employee’s next paycheck.  Can the employer do this?  The answer depends on whether the employer complies with a Maine statute that specifically addresses this question.  The employer may only be able to recover a portion of the overpayment from succeeding payrolls until the full amount is recovered.

 Sound familiar?  Even if it hasn’t happened to you, this did happen to one Maine employer.  Fortunately, it followed the rules and was able to recover the overpayment in full.  But if it hadn’t complied with the law, the employer would have forfeited its right to recover and the employee would have gained a windfall.

 The statute in question is part of Maine’s employment practices law.  Under § 635 of Title 26, an employer who has overcompensated an employee through employer error may not withhold more than 10% of the net amount of any subsequent pay without the employee’s written permission.  “Over compensation” means any compensation paid to an employee that is more than that to which the employee is otherwise entitled under the employer’s compensation system.  It does not include fringe benefits, awards, bonuses, settlements or insurance proceeds in lieu of compensation, expense reimbursements, commissions, or draws or advances against compensation.  The “net amount” of any subsequent paycheck means the money due to an employee as compensation after deductions or withholdings other than a withholding to recover any overcompensation amount.  In other words, if an employer has overpaid an employee, the extra payment can only be recovered in increments, not all at once.

 There are exceptions to this rule.  Written permission to recover the full amount is the most important.  Also, if an employee voluntarily terminates employment, the employer can deduct the full amount of the overcompensation from any wages due.  In addition, if an employee knowingly accepts the overcompensation, the statute does not apply.  Keep in mind, however, that the employer has the burden of proof on this point. 

 In the situation described at the beginning of this article, the employer was advised to promptly tell each affected employee, preferably followed up in writing, that the payroll service had made a mistake.  Since the employee then knew that the extra money in his or her account was an overpayment, the statute would not apply if that money was taken after the employee was notified.  Of course, the employer would have to prove that the employee accepted the money after being told it was paid in error.  If the employee had already taken the money before being notified, the employer could only have recovered the full amount from the next paycheck if the employee gave his or her written permission.  Otherwise, the employer would have had to deduct no more than 10% of the net amount of subsequent paychecks until the full amount was recovered.
 An employer can pay a stiff price for failure to heed these rules.  An employer who violates the statute and has more than 25 employees forfeits any claim to the overcompensation.  Employers with 25 or fewer employees also forfeit the claim if they know about these limitations and still violate the statute.  Even if it doesn’t know about the law, an employer of 25 or fewer employees will forfeit any claim to the overcompensation if it does not return all money withheld in excess of the amount permitted under the statute within three days after a written or oral demand by the employee.  So no matter what your situation, it pays to know the law.