How Long Does an Employer Have to Fix a Payroll Error?

Everybody makes mistakes, but when a payroll error does occur it’s important to resolve it swiftly and appropriately. Of course, the fix greatly depends on the type of payroll error that was made, as well as any federal and state laws and statutes of limitations. 

The first step is, don’t panic! Next, keep reading, as this guide will walk you through the most common errors, how to correct them, and how to avoid payroll errors in the future.

What Causes Payroll Errors?

There are several reasons payroll mistakes occur. Here are some of the most common:

• Losing track of accrued wages for hourly workers due to varying schedules
• Failure to properly calculate overtime 
• Glitches in payroll software
• Switching to a new payroll service provider or software
• Rushing through payroll without double checking
• Fraudulent activity, such as wage theft

Now that you’re familiar with the most common errors and why they occur, let’s look at how long you have to correct the mistake.

Statutes of Limitations

Payroll errors typically result in underpaid or overpaid wages. Depending on the situation, you have a certain amount of time to correct these errors before you violate the law. Here’s how you handle underpayments and overpayments.

Underpayment

When it comes to underpayments, it’s on the employee to alert their employer of the mistake. This should be done as soon as they notice the shortfall on their pay stub, though the Department of Labor (DOL) gives workers two years from when the mistake was made to ask their employer to correct it. 

If an employee fails to catch the mistake within five years, the employer is no longer liable for the unpaid wages. However, if you discover an error before your employee does, you should be proactive and address it right away. You don’t want to face a wage claim down the road. 

How long an employer has to correct an underpayment varies from state to state, depending on labor standards and wage payment regulations. Some states require an underpayment payroll error to be resolved by the next pay period. Other states have no requirement on the matter. Check with your state guidelines to make sure you stay in compliance. 

Overpayment

Overpayments require an employer to collect the overpaid wages from the employee. As with underpayments, each state has different requirements as to how long employees and employers have to resolve overpayments. 

Some states start the clock when a company notifies their employee of an overpayment, then provide a timeframe. A state may also have guidelines around deducting overpaid wages from a subsequent paycheck.

Additionally, some states may require a business to make a formal notification of overpayment to the affected worker and keep documentation of the notice on file. Even if your state doesn’t have such a requirement, it’s a good business practice to alert your employees right away and be transparent about what caused the error. 

How To Prevent Payroll Errors

Payroll mistakes happen, but it’s worth putting the right practices in place so that your risk is minimal. Here are a few tips to prevent payroll errors:

• Keep detailed and accurate employee records of pay rates, withholdings, and deductions. When your employee data and payroll records are accurate, you’re less likely to make a payroll error.
• Automate your payroll processes. Human error is one of the most common causes of payroll mistakes. Invest in the latest payroll software and make sure your staff is properly trained on it.
• Encourage employees to bring mistakes to your attention. Provide clear instructions on what staff should do when they discover a mistake on their pay stub, and make sure they’re familiar with the statutes of limitations.

In addition to these tips, stay up to date on federal and state laws on fixing payroll errors. Laws change from time to time, and it’s on business owners to make themselves aware the current regulations. 

Summary

Making a payroll mistake is annoying, but it’s not the end of the world. Failing to handle it properly, however, can lead to legal consequences and disgruntled employees. Keeping your payroll records organized and being familiar with federal and state regulations will enable you to resolve payroll errors quickly and efficiently – and reduce their occurrence.