What happens when an employee gets overpaid? Can you take the money back with or without their written authorization? What about a payroll advance? Well it depends.
Labor Code section 221 sets forth the general rule that it is illegal for an employer to collect any part of previously paid wages. Section 224, however, establishes several exceptions for withholdings involving: (1) state or federally required or authorized deductions (such as taxes); (2) deductions for insurance premiums, hospital or medical dues, or “other deductions not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to wage agreement or statute,” that are authorized in writing by the employee; and (3) deductions to cover health and welfare, or pension plan contributions.
Case law makes clear that deductions from an employee’s final paycheck for debts owed to the employer are prohibited, even with prior written authorization. In Barnhill v. Saunders (1981), the employer deducted the balance of a loan from a discharged employee’s final check. The court concluded that “an employer is not entitled to a setoff of debts owing it by an employee against any wages due that employee” on the employee’s final paycheck.
In California State Employee’s Association v. State of California (1988), the employer conducted an audit that concluded that they had made numerous erroneous overpayments to hundreds of employees. The employer notified the employees that they were going to make monthly deductions from employee salaries to recoup the overpayments. The employer did not have the employee’s signed authorizations to make the deductions. The court held that the employer could not make deductions from pay for prior “erroneous salary advances.”
Employee authorization is critical to permitting such deductions. Labor Code section 224 provides that a deduction that is authorized in writing by the employee does not violate the prohibition in Labor Code section 221 against the unlawful collection of wages. In fact, the Labor Board has previously stated that a deduction for previous overpayment of wages is not unlawful as long as there is a previous written agreement based upon the voluntary consent of the employee, provided that the deduction does not exceed the authorized amount and, after making the deduction, the employee receives no less than the minimum wage for all hours worked in the pay period.
Payroll advances present a problem. The money given to an employee in advance of work performed becomes a debt. The money was never “earned” to make it a wage. If the employee leaves before paying back the entire amount remaining is a “debt” owed to the company. You cannot take the balance out of the final check. I would strongly recommend not giving payroll advances. If you do, limit the time frame for repayment to one payroll period.