Statute of Limitations on Payroll Overpayment

Payroll overpayment occurs when an employer pays an employee higher wages than owed. Overpayment usually happens due to clerical errors but also can result from an employee defrauding his employer by entering false information on time sheets or time clocks. The statute of limitations by which the employer must legally collect an overpayment varies by state. Under certain circumstances, the employee is responsible for returning payroll overpayments indefinitely, a limitation that commonly applies to government employees and those who defrauded their employer.

The federal government allows payroll deductions for overpayments without the consent of employees and does not set a federal statute of limitations by which employers can recover an overpayment. Some states with better protections for workers require consent of employees before employers deduct overpayments from their paychecks, but those states do not prohibit an employer from pursuing collection activities against an employee. Under the California Labor Code, California employers can deduct sums from an employees’ paycheck for payroll overpayments only with the written consent of the employee. Washington state allows employers to deduct overpayments without written consent only if they catch payroll errors within 60 days of making an overpayment.

State laws on the collection of payroll overpayments by private employers usually classify overpayments as oral contracts, which have a statute of limitations that can range from three to 15 years. For example, the West Virginia Wage Payment and Collection Act allows collection for overpayments no later than five years after the payment error, the same as the limit for oral agreements. Some states have laws that restrict the statute of limitations. For example, Michigan sets a six-month limit on overpayment collection under the Michigan Payment of Wages and Fringe Benefits Act, which differs from the six-year state limit on oral agreements.

Federal employees do not have a statute of limitations on payroll overpayment, according to Title 5, Section 5514, of the United States Code. The federal agency to which the employee owes a debt can take up to 15 percent of the employee’s disposable weekly pay to recover the overpayment. If the employee leaves the agency and obtains private sector employment, the U.S. government can seize any payments owed to him by the Treasury, such as tax refunds, until he pays off the overpayment in full.

Whether an employee who works for a state government must return payroll overpayments varies widely by state, so he should consult an attorney or his local state code. For example, Washington state employees face no time limits on collection, according to Section 49.48.200 of the Revised Code of Washington. In contrast, Michigan allows state offices to collect wage overpayments only within six months of overpayment, as of 2011.