Imagine how stressful this situation would be: Natalie’s boss called her into the office recently and gave her some bad news. Thankfully, it was not a layoff, but it was something almost as stressful — and potentially financially devastating.
Her boss said the payroll department had made errors over the past several months, and in total, they’d overpaid by about $7,000 over the course of a year.
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Natalie was shocked. Since she works two jobs, she hadn’t noticed the incremental overpayments, and she admitted she hadn’t been reviewing her bank statements every month.
Her boss then gave her even more disconcerting news: He said Natalie can either pay all the money back, or work for free until she makes up the hours. Natalie was shocked. She lives paycheck to paycheck, and she can’t afford a lump-sum payment of $7,000. Her boss didn’t seem to think a repayment plan would be possible.
Natalie didn’t know what to do. She wasn’t sure if her boss could legally compel her to work for free, or even to pay the money back at all.
Can your employer legally claw back money?
Federal and state laws allow employers to garnish (automatically reduce) workers’ wages if there has been an overpayment. However, there are also rules about how much an employer can take.
Under the U.S. Consumer Credit Protection Act (CCPA), there are restrictions on the weekly amount that can be deducted from your pay. If the amount of weekly “disposable earnings” (the amount after legally required deductions like taxes and Social Security) are more than $290, a maximum of 25% can be deducted. If your disposable earnings are less than $217.50 (or 30 hours of work at the federal minimum wage of $7.25), nothing can be deducted. For disposable earnings more than $217.50 but less than $290 (40 hours at $7.25), your employer can garnish the amount above $217.50 (1).
State laws will also impact how and when an employer can garnish wages after overpayment. In most states, an overpayment is classified as a wage advance, and employers do not need permission from the employee to make deductions.
If state law differs from federal law on wage garnishment, the CCPA states that whichever law results in less money being garnished will be applied (2).
Luckily for Natalie, she lives in New York, where there are additional provisions that protect workers when employers make garnishments for overpayment.
The law in New York states that the employer must give the employee a notice of intent to make garnishments for overpayment. The notice must also:
- Be given at least three weeks before the deductions start (unless the amount can be recouped in one wage payment, and other procedures are followed).
- State the amount overpaid in total and per pay period
- State the total amount to be deducted and the date of each deduction
- Include information about when and how the employee can contest the overpayment
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Perhaps most importantly, in New York, deductions for overpayments can only be made for the eight weeks of overpayment prior to the delivery of the notice of intent to the employee.
In New York state, if the overpayment is less than or equal to your next paycheck, the entire amount can be deducted from that check. However, if it’s more than the next paycheck, the maximum amount that can be deducted is no more than 12.5% of your gross earnings, and the amount cannot make your effective hourly wage less than the state minimum wage (3).
What you should do if this happens to you
Natalie’s boss’s suggestion that she work for free to pay off the wage overpayment is illegal. Because she lives in New York state, her employer can only deduct the overpayments in the eight weeks prior to her receiving notice. The meeting with her boss also doesn’t count as official notice; her employer needs to provide her with a document that meets the above parameters.
Natalie should let her employer know that asking her to work without pay is a violation of labor laws. It is her employer’s responsibility to serve her proper notice about the overpayment and upcoming garnishment.
Since her state offers more protection around this issue, Natalie most likely won’t face a wage deduction that would leave her unable to pay her bills. Still, her wages will be impacted, and she needs to budget accordingly. She may need to cut back on discretionary spending until her paychecks are back to the normal amount.
In the future, checking both her pay stubs and her bank statements will go a long way in preventing this kind of unexpected loss of income — which will also help you catch if your employer is underpaying you. An Ernst & Young report from 2022 found that the average company’s payroll accuracy is only 80.15%, which means you could be missing out on wages you’re owed if you’re not watching your bank balance (4).
If you believe your employer has made deductions from your pay illegally, you can file an administrative claim with your state’s department of labor, and depending on your state, you may be able to file a lawsuit (2).
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
U.S. Department of Labor (1); Thomson Reuters (2); New York Department of Labor (3); Ernst & Young (4)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.