Let’s say your payroll department inadvertently makes a mistake and overpays an employee by direct deposit, $1,000. Your payroll administrator discovers the mistake the next day because the employee is gleefully telling all of his co-workers about it. Can you immediately deduct the amount from the employee’s bank account?
Deductions from employee wages in Illinois is covered by the Illinois Wage Payment and Collection Act, which is enforced by the Illinois Department of Labor (IDOL) and state courts. An employer’s recourse, when it has overpaid an employee or when the employee owes the employer money for any reason, is determined by two things: timing (isn’t almost everything a matter of timing?) and whether the employee agrees that an overpayment has been made or a debt to the employer is owed.
The answer to the original question of whether the employer can unilaterally go back into the employee’s bank account and reverse part or all of a direct deposit to correct a disputed overpayment is an emphatic NO. The IDOL regulations state that “[U]nder no circumstances may an employer or its agents deduct or cause to be deducted disputed amounts from any banking account of the employee.” Clearly, IDOL doesn’t want employers messing with employees’ bank accounts without permission or to gain the upper hand in a pay dispute.
City of Chicago agencies (e.g., park districts, CTA, etc) and municipalities also have recourse to collect a debt, which can include an overpayment, by withholding up to 15% of the net amount of pay after giving the employee what amounts to a due process hearing regarding the disputed amount.
When an employee, as in our example, acknowledges the overpayment, an employer has one of two courses of action, depending on the timing of the discovery of the overpayment. According to the IDOL regulations “[W]hen an employee agrees an overpayment has been made the entire sum may be deducted on the employee's first regular payday subsequent to the payday on which the overpayment occurred. If an overpayment is not discovered and one or more paydays have passed, the employer and employee shall agree on a repayment schedule. If the employer and employee cannot agree, the employer cannot make deductions without complying with Section 9 [i.e., notice and hearing requirements and a cap of 15% of net withheld from a check] of the Act.
Other than overpayments, deductions mandated by law (including wage deduction or assignment orders), deductions made for the benefit of the employee (insurance premium contributions, union dues, etc.) or by agreement with the employee given at the time that the deduction is initiated, the employer is prohibited from making any deductions from an employee’s paycheck. This prohibition includes deductions for damage to equipment, cash or benefit time advances or in lieu of return of the employer’s property.
Employers should note that as soon as an employee overpayment is discovered, you should meet with the employee to discuss how the mistake will be rectified. Often employees believe that a mistake in their favor should be irreversible, so they might be slightly irritated to hear that they have to give the money back. If a significant amount of time has passed, repayment may go smoother if the employee is allowed to repay the money in smaller increments.