It may seem self-evident that an employer should be able to recoup a wage overpayment merely by adjusting an employee’s future paycheck(s). And, clearly, under the Fair Labor Standards Act (FLSA), that is the case. Because the Department of Labor views overpayment as a “loan or advance of wages,” nothing in the FLSA prevents an employer from recouping an overpayment from an employee’s paycheck, even if the employee has not expressly authorized it and the recoupment cuts into the minimum wage due to the employee.1 But whether such a recoupment is permissible under state law varies from state to state. Many states have statutes or regulations that expressly permit recoupment or have been interpreted to allow recoupment under certain conditions. Other states have statutes or regulations that have been interpreted to prohibit overpayment recoupment through paycheck adjustment. Thus, it is crucial for employers to consult state laws before proceeding with an overpayment recoupment.
Recoupment Expressly Permitted
Some states have statutes or regulations expressly permitting employers to recoup overpayment under various conditions.2 For example, in the state of Washington, an employer may recover an overpayment without employee authorization if the overpayment was “infrequent and inadvertent” and the error was detected within 90 days. The employer must also provide advance written notice to the employee, and documentation showing the overpayment and the terms of the overpayment adjustment. In Indiana, recoupment without authorization is also permitted, but an employer must provide the employee two weeks notice prior to the recoupment, and the amount an employer may deduct is limited.
In other states, overpayment recoupment is expressly permitted by statute or regulation, but only if the employee freely consents in writing at the time the adjustment is made.3
Recoupment Allowed Per Interpretation
If a state has no statute or regulation that specifically prohibits overpayment recoupment, some state wage/hour or employment standards agencies interpret that to mean that overpayment recoupment is allowed, even though the state has laws that otherwise limit or prohibit “deductions.” For example, in Virginia, although the state deduction statute does not list overpayment recoupment as a permissible deduction, an employer may recoup an overpayment from an employee’s future wages or salary without obtaining authorization because such unearned compensation is not paid for time actually worked.4
Additionally, enforcement agencies in other states have interpreted wage deduction statutes that are silent as to overpayment recoupment as permitting the practice, but only if there is a written agreement between the employer and employee.5 Some states attach other requirements to recoupment, such as the employee’s check must remain above minimum wage after the overpayment is recouped or the recoupment must be made from the paycheck immediately following the overpayment.
Recoupment Prohibited Per Interpretation
Unlike the U.S. Department of Labor, some states do not view wage recoupment as repayment for a loan or advance. Rather, they characterize recoupment as a “deduction” prohibited by their state law. For instance, in January 2010, the New York State Department of Labor issued an opinion letter stating that an agreement to recoup an overpayment through a paycheck adjustment is prohibited under the New York deduction statute, because overpayment recoupment is not a permissible deduction enumerated in the law.6
In Oregon, although the Bureau of Labor and Industries (BOLI) considers overpayment a form of advance and does not consider overpayment recoupment a form of deduction, a federal court found in 1997 that such an offset was impermissible under the state deduction statute.7 Because of this interpretation of the statute, overpayment recoupment through paycheck adjustment is prohibited in Oregon. Although BOLI will not pursue employee wage claims where a recoupment is involved, an employee whose check has been adjusted to account for an overpayment may nevertheless take action in court.
Before seeking to recoup an overpayment from an employee’s paycheck, an employer must check state laws and regulations.
Even where a state allows recoupment without express employee authorization, best practices suggest that an employer should get a written acknowledgment of overpayment where possible, and the recoupment plan should be put in writing.
Employers shouldn’t assume that a paycheck adjustment for overpayment is permitted just because the law is silent. On the other hand, employers also shouldn’t assume that a wage deduction statute is necessarily a bar to recoupment, either.
The interpretation of state statutes and regulations varies from state to state and even between administrative bodies and courts. Thus, employers should consult with an experienced wage-and-hour attorney or state agency to get clear guidance prior to proceeding with an overpayment recoupment.
1 See Department of Labor, Wage and Hour Opinion FLSA2004-19NA
2 See, e.g., WAC 296-126-030; IC 22-2-6-4
3 See, e.g., 56 Ill. Admin. Code 300.900; N.J.S.A § 34:11-4.4, 12 N.J. Admin. Code § 55-2.1(iv); 40 Okla. Stat. § 165.2; Okla. Admin. Code § 380:30-1-2
4 See Va. Code Ann. § 40.1-29; Virginia Department of Labor and Industry, Field Operations Manual, Ch. 10., pp. 45-48.
5 See, e.g., Cal. Lab. Code §§ 221, 224; California Department of Labor Standards Enforcement Opinion Letter 1999.09.22-1
6 See New York State Department of Labor Opinion Letter RO-09-0152
7 Duncan v. Office Depot, 973 F. Supp. 1171 (D. Or. 1997); Oregon Technical Assistance for Employers, Overpayment of Employee Wages FAQ