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What To Do When You Overpay or Underpay Staff

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In companies where payroll is managed manually, it is not unheard of that there may be errors in the payroll. Humans are prone to mistakes, which can manifest as either underpaying or overpaying staff members.

Paying your staff the exact agreed-upon amount is the law, and anything above or below is an error that must be rectified.

You must address underpayments and overpayments immediately because it puts you at risk of non-compliance. Affected staff members will also be displeased, especially in the case of underpayment, which can affect their productivity. Below, we have outlined steps you can take to fix this and ensure that it doesn’t reoccur.

Overpayments

In cases where you overpay an employee, you have the right to reclaim your money back.

Once the overpaid employee has been notified about the overpayment, you can reclaim it in any of the following ways;

  1. The employee can pay back the excess as a lump sum.
  2. They can pay back the excess in instalments until the payment is complete.

A recovery agreement should be put into writing and then signed by both the employee and employer or HR to protect the interests of both parties and enforce their rights. 

To make the process easier, here is a step by step procedure you can follow to reclaim the money:

  • Reach out to the affected employee the moment you notice the overpayment.
  • Explain what happened carefully. At this point, you have to ensure that the employee understands the implications.
  • Ask to know what financial implications the repayment will have on them.
  • Ask which repayment method will work best for them and cause them the least financial strain – the instalment payment or the lump sum.
  • Whatever decision you come to, put it into writing and have both parties sign it.
  • Begin making the agreed-upon deduction(s) from the employee’s next paycheck(s).

Here is an email template you might find helpful when requesting for balance payment from an overpayment.

Hello [INSERT NAME],

In a recent audit, we discovered that we accidentally overpaid you by [INSERT AMOUNT] on [ INSERT DATE]. This was an error on our part, and we take full responsibility. To fix the situation, we’ll need to deduct [INSERT AMOUNT] from your next paycheck on [INSERT DATE].

If you prefer another repayment method, or if the aforementioned plan will cause a financial burden, please let us know. 

To make it easier on you, we can do [INSERT NUMBER OF INSTALLMENTS] smaller deductions over [INSERT NUMBER OF PAY PERIODS] pay periods.

Once again, we are sorry for the inconvenience. Thank you for your understanding.

[INSERT YOUR CONTACT INFORMATION]

Note that this is not the agreement that both parties will sign.

 

In case of overpaying an employee that has left the company, here is what you do.

You are well within your rights to ask that an overpayment be repaid, even if the employee no longer works for the company. However, recouping the overpayment is not as straightforward as it would be with an employee that still works for the company as the employee can simply say, “No, thank you, but I’ll not be giving this money back.”

You may decide to take legal action when this happens, though legal fees may cost more than the sum you wish to recoup.

If you want to take them to court for this, you need to get enough information about their current employment status. This lets you know whether or not they can afford to repay you.

Can the employee lay claim to the money?

In some cases, the employee can claim the money and say they are entitled to it. And since the payment error is most likely not their fault in the first place, their claim to the money could be successful.

A better approach would be to have a friendly conversation and reach an amicable conclusion. Be sure to put any decision into writing and have it signed.

 

Underpayment

While employees may take an overpayment in stride, underpayment will undoubtedly cause a fair amount of uproar in the workplace. When it becomes recurrent, the morale of the staff reduces, leading to decreased efficiency, decreased productivity, less engagement at the workplace, all of which can affect the company negatively. Underpaying your staff can also get the company into some very bad legal complications.

To correct an underpayment, here is how you go about it;

  1. Find out how long the underpayment has been going on. The duration is essential in determining how much you have to pay back. 
  2. Find out how much they were actually paid. This can easily be gotten from your payroll records.
  3. Confirm their original salary, and then calculate the difference between what was paid and their entitlement.
  4. Include the repayment in their next pay.
  5. Have the affected party sign an agreement that the error has indeed been corrected.

 

Note that before you begin to rectify the error, you should talk to the affected staff(s). They need to know that you made an error and that you are working on rectifying it. Even if you are rectifying the error, without due communication, the affected parties might begin to get agitated and it could affect their work. 

The final step of fixing an underpayment is to ensure that it doesn’t happen again. Consistently underpaying your staff, by accident is not a good look on the company, so all measures have to be taken to ensure it doesn’t happen again.

 

How to avoid payment errors

What’s better than fixing payment errors as soon as they occur? Preventing them, of course. To do this, the human aspect of payrolling has to be eliminated or reduced to the barest minimum.

Your company can invest in a payrolling software like SeamlessPayroll that can manage your entire payroll process with just a few clicks. Such an investment will save the company a lot of money and prevent any legal actions from being taken due to payment errors.

 

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