So you’ve realized that you have paid an employee who no longer works for your organization. First things first: pinch yourself. Did it hurt? If so, good! That means you are human, and all humans make mistakes. Now, how do you go about correcting this oversight?
Overall, the process to reclaim funds remains consistent, but the process of reclaiming overpayment can vary based on how the below questions are answered:
- Do you have an overpayment policy in your employee handbook in place?
- What are your state laws/regulations for repayment of wages from employees (former and current)? Some states only allow for the collection of overpayments for up to a few weeks, while other states offer multiple years after the overpayment.
- What is the gross overpayment amount (was it a full salary payment, a few payroll deductions, etc.?)
- Is it worth going through the trouble to retrieve the funds based on the amount overpaid? Or let it go?
- How current was the overpayment? Last week? Last calendar year?
- Did the employee leave on good terms? Do you foresee it being difficult to obtain the repayment from this employee?
Only you can answer the questions posed above (maybe with some assistance from your tax accountant), but the guidance below will help set forth a formal outline of the procedure to retrieve the overpayment from your previous employee.
Overpayment Retrieval Process
Document! Document! Document! – It is imperative that all communications between the organization and the former employee are documented if the organization needs proof of the conversation later. It is up to the organization to determine the most appropriate outreach channel used to contact your former employee – a phone call followed up with a formal email (with a read receipt) or certified letter with proof of delivery. Alternatively, forfeit the call and utilize an email/certified mail method. It is important to remember to use the same verbiage if you call the employee as to what is written in the formal email/certified letter to avoid confusion.
At a minimum, the following details need to be outlined in the formal email or certified letter:
- State the salary overpayment gross amount
- Explain the reason for overpayment (clerical error, oversight, etc.) – again, be honest
- Formal ask that the repayment be made within 30 days through a mutually agreed upon payment installment (or whatever time frame/process appropriate to your business)
- Ensure to the terminated employee that their W2 will reflect correctly if still within the same calendar year of the overpayment
- A mailing address for the terminated employee to mail a check should they prefer
- A sincere apology for the overpayment
- Contact information for the terminated employee to call should they have any questions or concerns
Other details that may need to be addressed in the formal email or certified letter include:
- A statement regarding what may happen if the full payment is not received within the timeframe provided (turned over to collections, litigation as a civil debt, etc.)
- If the repayment occurs in a different calendar year, a statement regarding issuance of a W2-c and what a W2-c means to the terminated employee
What If I Do Not Receive Any Response from the Terminated Individual?
There will be times when you and your organization have done all in your power to solicit a response and action from the terminated individual with no luck. As an employer, you are entitled to retrieve the overpayment even though the terminated was not at fault. Depending on the amount of money due back from the terminated individual, it may cost more in legal fees/collections fees then to just write off the overpayment amount as a loss. For example, collections agencies can charge upwards to 20% to 40% of the amount collected. Legal fees can soar even higher! Your organization will have to weigh the true cost (no pun intended) if you plan on seeking a third party to assist with reclaiming the overpayment.
Ways to Drastically Reduce the Risk of Paying Terminated Employees
The best way to mitigate the risk of overpayment is to put processes in place before it inevitably happens. Below are a few techniques/actions an organization can take, as well as how easy Whirks makes it on behalf of our clients:
Create an overpayment policy and place the policy in your employee handbook
The policy added to an employee handbook will be signed off on by an employee. This policy can be as simple as outlining the repayment procedure should it be needed. Also, it may be useful to list multiple repayment avenues should there be more than one (i.e., lump sum repayments or installments).
Whirks offers the HR Essentials package, part of which includes sitting down with our clients to write an employee handbook with policies tailored to the specific needs and operations of your organization. It is crucial that your organization has a well-written employee handbook for all areas of your business, including unavoidable scenarios such as overpaying current or terminated employees. Make sure you’re covered and let Whirks help you ensure that your organization has a strong and compliant handbook!
Pay Special Attention to Payroll Reports
It is no surprise that some companies simply do not have the payroll technology to produce payroll reports easily. That’s ok, but a formal payroll reporting process is needed for a myriad of reasons to ensure proper payroll processing from every angle. Some reports that will be beneficial to review (preferably before fully submitting payroll) include a Payroll Summary Report, Check Register, Direct Deposit Register, etc. Some systems will have varying names for the reports I just mentioned, but the most important thing to remember is this: your totals should match and your employees listed are active and receiving the correct pay.
Whirks has standard payroll reports that can be based on a per payroll basis and that can be viewed BEFORE payroll is fully processed. With us, your organization can easily view reports to ensure that the proper people are being paid and paid the right amount. Whirks can even take it one step further and offer an alerts export report that is fully customizable to the needs of your organization. For example, you can have an alert that shows that a terminated employee is receiving pay or that an employee is receiving pay above an organization-specified threshold. There are many alerts that can be built based on your needs!
Standard operating procedures are vital in the operations of any business. The same goes for offboarding associates. At a minimum, there needs to be a documented process that your employees can follow when offboarding associates so that each employee offboarding is carried out efficiently and consistently as possible. These procedures should capture how and when to carry out each function of an employee’s offboarding, including final pay and the action items within a payroll to ensure that further payment is not an option unless needed.
Whirks offers Employee Offboarding which is a digital workflow found within our award-winning software that is fully customized based on the needs of your organization. Employee offboarding through Whirks customization includes but is not limited to:
- Specific user access and roles
- Termination details (last day worked, eligible for rehire, benefits enrollment termination date, etc.)
- Company asset list (laptops, keys, badges, etc.)
- Last paycheck requirements (HELPS MITIGATE RISK OF PAYING TERMINATED ASSOCIATES!)
- Accrual amounts and determination of what should be done with remaining amounts, cancellation of future PTO, etc.)
- Exit interview survey form attachment options
- And many more options!
It’s up to your organization on how to proceed
Ultimately, it will be up to your organization how you go about reclaiming overpayment to a terminated employee. By asking yourself the rhetorical questions above and following the communication guidelines, your organization will be compliant and on the right track to reclaiming the money owed.
It is never fun to first admit that you made a mistake, especially when it requires you to reach out to someone who has been involuntary or voluntarily terminated by your organization. Correct communication is essential for this reason and your organization knows your terminated employee best. Rip the band-aid off and act as swiftly as you can to avoid any additional administrative burden on your organization if possible.
Lastly, to err is human, so do not beat yourself up! Errors happen to the best of us. At Whirks, we understand that mistakes happen, and we choose to “Own It” and make it right. That’s the only way to keep on moving forward so you can, as we like to say, get “One Step Better” each and every day.