'The ability to just deduct the overpayment from a future pay can be quite complex depending on the size of the overpayment'
There are several ways employees may be overpaid, but there are also important steps employers can take to remedy the situation.
Canadian HR Reporter spoke with Laura Angelo, compliance advisor at the National Payroll Institute.
What are the most common ways employers overpay workers?
“They’re going to include basically incorrect hours being processed for the employee, maybe the time card wasn’t correctly authorized or scrutinized; it could be within our systems, but too many hours have been processed for an employee in a pay period.
“There are also instances where the wrong rate of pay has been used. Those are going to be an environment where you have automated pay scale advancements perhaps, but an individual may have changed position and they were paid the wrong wage rate, hence they received an overpayment.
"Also, really common is paying inactive employees: Either the employee has been terminated but they continue to receive their regular salary – that’s more common likely in salary employees more than hourly timecard employees but it does happen — or an employee goes on an unpaid leave of absence and there is a time delay in that information being received, hence the employee has been overpaid.”
What should an employer do if an employee is overpaid?
"Essentially, your employee needs to be notified, and it should be in writing, as soon as we have that salary overpayment. Some employers might consider sending that notice by registered mail, especially in the case of a large overpayment and if the employee is no longer with your organization or on a paid leave of absence.
“The ability to just deduct the overpayment from a future pay can be quite complex depending on the size of the overpayment. Because as an employer, we’re going to discuss the overpayment with the employee. We’d reach a mutually agreed period for repayment, how it will be repaid. Ideally, the optimum solution is it’s paid immediately. But of course, each circumstance can be different. An employee may or may not be aware that they are paid the wrong pay rate. Think of hospital employees who have varying hours and their overtime can be off the wall. They may not have realized they were paid too many hours.
“We’ve got to consider our employees’ financial wellness, the circumstances regarding how the overpayment occurred, and be a little sensitive and conscious that the employee may not have realized and they don’t have the money. This is commonly what we hear: ‘It was spent.’ That aside, that.. is still legally not their money so we’re going to work with that employee on a beneficial, reasonable repayment schedule.”
How should the deductions be taken?
“Let’s say I overpaid you $500 in a previous pay period. When you agree as an employee that I can deduct that from payroll, I am not just going to apply that amount against your current actual correct gross earnings — that can lead to a lot of issues. We could [be] misrepresenting pensionable earnings and it could affect our current registered pension plan contributions, union dues and other legal garnishments. So there’s a whole lot of considerations why we’re not just offsetting against our current gross earnings.
"When the employee has agreed to repay the error, we’re going to facilitate that through an authorized payroll deduction. [Employers would] want to be sure that [they’re] setting that up as an after-tax miscellaneous account receivable deduction and [they’re] not just offsetting it against correct wages. "
Is there a Canada Revenue Agency policy regarding this?
“Thankfully, employers have the ability to offer the employee to repay the net, regardless of the tax year.
“So [if] we’re going to calculate what the net/gross is minus any statutory tax, and this is the net amount [that employees that overpaid] would owe, we can facilitate this provided there are some conditions, because it’s a relatively new legislation introduced, where the overpayment is made in a year after 2015, made in three previous tax calendar years, and the employee has agreed to make that repayment.
“We can then accept the net repayment, we will amend the affected T4 slip, removing the gross and the statutory EI, CPP and income tax. Net balance becomes now the miscellaneous amount receivable in the current tax year that [the employer] has that authorization to deduct as an after-tax deduction.
“It’s important that the repayment amount, if it does not bring the person below the annual maximum pensionable for CPP and insurable for EI, well then there’s not going to be that relief given to the employee because that repayment still keeps them above the maximum pensionable and insurable. So we’re going to run into deficiency issues if we allow those deductions as well to be accounted for.”
What should employers do to avoid having to deal with this issue?
“Essentially, we need big, documented processes on payroll teams. It’s essential. We work with checklists and process checklists. So any manually keyed data into a system absolutely needs to have a review and preferably reviewed by a second individual, not the same individual entering data," says Angelo.
"If we have our supply with a listing of employees who are on leaves of absence and their expected return dates, this helps avoid the overpayment. Automated time and attendance systems, although again, it has to start with authorization being timely and accurate.
"Having a really good communication system between all stakeholders involved in the payroll process [is key]. It is now only the end result or the payroll team. So communication between management, human resources, labour relations, payroll, communicating what the deadlines are for submitting payroll changes to ensure payments are accurate and avoid those overpayments.”
Rules for overpayment by region
Regional governments in Canada also have different rules around how employers can retake overpaid amounts to employees:
Alberta: In the case of a recovery of an overpayment due to payroll calculation error (for overpayments that occurred on or after Nov. 1, 2020), employers don’t need written authorization from the employee for this type of deduction. However, employers must provide employees with written notice before they make the deduction for the overpayment. Employers can only deduct for errors that occurred within six months prior to the deduction.
British Columbia: If an employer overpays an employee's wages, the overpayment cannot be deducted unilaterally from future wage payments. An employee may provide written consent to the deduction for an overpayment through a written assignment of wages. Should the employee not voluntarily consent to a repayment arrangement the employer can't use a withholding of all or a portion of wages as a remedy.
Manitoba: Employers can only make deductions from wages when these are to compensate for any cash advances or payroll errors.
New Brunswick: Employers should contact the Employment Standards Branch before making any deduction to an employee’s wages other than those regulated by law (EI, Canada Pension and court ordered).
Newfoundland and Labrador: Overpayment of wages can be deducted from wages.
Nova Scotia: Lawful deductions include the recovery of pay advances, overpayments.
Ontario: In cases where the employer has made an overpayment, it can recover those monies from the employee’s wages, whether they are regular wages, vacation pay or termination pay.
Prince Edward Island: An employer can only make certain deductions from an employee’s pay as the result of a previous advance of pay to the employee.
Quebec: If you paid employment income by mistake to an employee who was not owed that income, the employee must generally repay you an amount equal to the gross income paid by mistake and recover any income tax, Quebec Pension Plan (QPP) contributions and Quebec parental insurance plan (QPIP) premiums withheld on that income.
Saskatchewan: Repayment plans would typically apply to active employees only (employees with a status of Active or Definite Leave of Absence) and are to be collected within the term identified. Repayment should be made over the same number of pay periods that the overpayment occurred or sooner. The requirements of the collective agreements are to be met. The Overpayment Repayment Plan Approval Request Form should be completed in situations where a repayment plan is applicable.
Northwest Territories and Nunavut: The law here states that for vacation pay and regular wages a written consent and approval are required from the employee to exercise any overpayment deduction, according to Checkmark Business Solutions.
Yukon: The employer should have a prior written consent from the employee for any deductions in the regular and vacation pay, according to Checkmark Business Solutions.