Employee Overpayment Snafu

A cautionary tale: an overtime miscalculation resulted in years of paycheck mistakes in the employees' favor, before the payroll manager figured it out. How should the boss respond? June 5, 2006

This week my office manager of 5 years came to me in tears because she realized that she has been making an error on overtime pay to my employees since I bought the business 5 years ago.

We have 13 employees. She ended up doubling some hours to employees when they had overtime and the pay period ended somewhere in the middle of the week. We pay on the 5th and 20th. This problem had the greatest affect on my two installers, because they get the most overtime. I had her research for the last two years and we discovered that each installer received about $2000 each year more than they truly had worked. Taxes and all that fun stuff were done correctly for the amount of money they were paid, so that is not a problem.

I have not had her waste any more time researching other years because I feel it will not serve any useful purpose. (Other than depress me more!) But I do believe we are talking $15,000 to $20,000 over the past 5 years. I have no intention of trying to collect any of the overpayment back from the employees... I just don't feel that would be right.

What do I do with my office manager? I know there are no perfect employees. She is generally competent and thorough. She does payables, receivables also. I don't really want to lose her and yet I feel there should be some consequence for her mistake. Maybe the mistake is so costly that it is wrong to keep her on.

I also realize that "the buck stops here" (no pun intended). I should not have trusted that the time cards were being done correctly all the time. I should have spot checked them.

The other thing that really bugs me is the fact that neither one of these installers ever said or noticed anything. For example, in my research, I found one pay period where one installer received $400.00 more than he earned. He had 160 hours of regular and overtime combined! Come on now - that is 16 hours a day for 2 weeks straight. We have never come close to that! One would think that a guy would notice that. The ironic part is... if we had shorted them 20 hours, you can bet they would be at her desk Monday morning wanting to know what happened.

One installer has been with us for 5 years, the other for 2-1/2 and I have never felt I should worry about their integrity. I believe they are both honest people. I am going to have a meeting with them this coming week and explain what has happened. I am really unsure how they will take it. I don't want them to think I am blaming them. They may think to themselves "Great, now we are getting a $2000 cut in pay!" It's our mistake, but I feel like I want to ask them "didn't you ever think something was not quite right? 160 hours!" I am struggling with how to handle this the best.

We are currently researching professional payroll companies to handle our payroll from now on.

Forum Responses
(Business and Management Forum)
From contributor G:
Did you still make a profit in the past with the over payments? If so, just stop overpaying everyone, do a regular audit of pay and put the extra money you will now have to something nice like new machinery or boat, etc.

From contributor B:
Mistakes do happen and I suppose that if they are never pointed out, they could continue for some time. Not understanding exactly how the error occurred, I have to say, I am a bit confused - for if a paycheck ends up $400 higher than it should be, I should think that a bookkeeper with less than average fiscal common sense would spot that. I am not even sure that I follow your illustration, for if a man received 80 hours of overtime in error, it would seem that the mistake would be much greater than $400.

I guess the procedure with the office manager should correspond with why she was hired and what her credentials are. If it is her job to keep all the financial matters of the business, you might consider her position, for if it has taken her five years to spot such an error, how can you be sure that there are not mistakes in other areas?

On the other hand, if this job was dumped on her and she was not fully qualified for the task but cheerfully embraced the assignment to be helpful, I would as the owner consider the mistake my own.

My greatest area of irritation would be with those who received the extra and reported it. I can understand not noticing an extra 20, but 400? This reveals to me an employee base without scruples. I am not advising to fire the works, but I would at least consider the matter! Like you, I would consider the oversight as water passed under the bridge. I would not try to collect the excess payment back.

From contributor T:
I am now a business owner like you, but was a builder, finisher and installer. I always knew what my paycheck should be and I'll put money on it that they do also. They were not saying a word because they were laughing all the way to the bank, especially after you never caught on. Do you think the installers and the office girl could be in this together? Kind of a great scam. If you could prove it, you could press charges. Things like that happen.

My employee knows what he is supposed to get, also. If I make a mistake on his check, he lets me know. But I have caught him not being honest with me. He is here for the paycheck, not the love.

From contributor I:
Who signed off the payroll/paycheck? If it was you, did you do any kind of reasonability test? If you expect the installer to know when he has been overpaid, then you should as well. If it wasn't you, you might want to consider just how far you are delegating responsibility.

As to the installers. I think the conversation should be couched as "I am surprised that you didn't notice the error," but if they do a good job and you still made a profit, you could end up spending a lot more money replacing them if you tee them off. Whatever you do, they are gonna feel like you have cut their revenue, because you have.

As to the administrator. You should congratulate her for bringing the matter to your attention as soon as it came to hers, and discuss with her how the two of you are going to rearrange the workload so that any mistakes like this get spotted sooner and dealt with quicker.

From contributor F:
If you think she made an honest mistake, just get her more training if that's what's needed. In the future, you'll have to keep an eye on things. Have an occasional audit if you think it's called for. As for the overpaid installers, I'm afraid I would be pretty upset. Keep them on if they have done a good job, but if they grouse about anything in the future, just remind them of the extra pay they received.

From contributor Q:
I don't agree with the others who tell you to keep the good installers if you made money. That's ridiculous! If they are selling crack out of your company trucks, but still make you money, you'd keep them? If they'll cheat you, imagine how much worse they'll cheat your customers. I'd certainly let them know that I became aware of what had happened over the course of those five years and gauge my response on how they took the news. I'd still look for new employees. Yes, good employees are very hard to find, but everyone knows exactly how much they should be getting paid every two weeks and it's beyond belief that none mentioned the extra pay. Sounds like you'd have been better off by propping your door open with a rock and letting the world come in and do their business with you on an honor system.

From contributor H:
I don't see that I would fire her. If she came to you with sincerity and regret and she honestly didn't manipulate the payroll, she probably struggled very hard to know how to tell you. She may have known for a few weeks, but was scared to know how to handle it. The fact is that she did come forward, knowing possible consequences, and brought this to your attention instead of staying quiet. I can foresee her trying to give you the best she's got for forgiveness.

The employees will be a challenge. They, like most people, have expected that money for that long and have increased their spending habits through those years to match the paycheck. Dropping $400 out of a paycheck will have them looking for jobs to meet their expenses. I would assume that they knew, obviously, and any new guy found out that it was a "you're stupid if you say anything" topic at break time.

I would, at a meeting, point out the mistake, state it as a mistake, and here are our options. The employees got free money for that time without speaking up and you are disturbed that no one came forward, but instead of taking that money away, in order for you to keep receiving that extra money, you're going to have to... [increase productivity, bring in some sales (referrals), etc] to match the amount that is over the correct amount. Basically having them work/perform for that extra raise. Still claim disappointment for their not coming forward, but let it go. And the subject is finished and not to be talked about anymore among anyone! Back to better work! Everyone at that meeting made the mistake, including yourself. Move on. If performance around there drops or the topic is discussed again among them, tell them they have to move on.

One on one, commend your office manager for still coming forward knowing it was probably tough to do, but to give you the best she's got here on out. And ask yourself why you never looked at the payroll numbers for five years and never caught that. Then forgive yourself and now go make an extra $15,000 to make up for it, claim it as lesson learned and start smiling again. You can easily make an extra $15k.

From contributor J:
Learn from it. Find out what needs to be done to prevent it and then get over it. I don't think that anything can be or should be done - just move on. You will sleep much better if you can correct the mistake and go forward. I think that your installers will probably come to you and say something like "why is my check so much smaller?" Then you can explain to them what happened. They, of course, will already know that they have been getting extra money, but I think that it would be wise to just go along with their pretending they had no idea. It is hard to lose money, especially when you can go through and put a direct number on it. I would just chalk it up to the cost of doing business and focus on the future.

From contributor C:
As I read it, you were using a salary pay schedule for hourly workers. Sometimes they got paid for app. two weeks and sometimes they were paid for app. three weeks. Then, depending when the week ended, they were paid overtime for that week one two pay checks. By being paid two times per month instead of weekly or biweekly, the hourly workers do not know what their paycheck will be - they just know a range. Unless your office manager had received training in this kind of payroll, then I would thank her for coming forward and then pay for her to get the training that she needs to do the job.

From contributor O:
In most places, it's not legal to reclaim overpayments from employees, so that almost certainly has never been an option. I agree that the thing to do is start paying the correct wages. If anyone comes forward to complain, explain what has happened to them. They're not likely to find anyone else who will overpay them, so they will have to get used to living on the correct wages. If they are likely to find better paid employment, then you will have to reconsider your pay rates.

From contributor E:
$2000/yr is only $40/wk and with varying paydays and lots of OT, it's quite possible they had no idea they were being overpaid and they may not notice when they stop getting it. Don't assume they were being dishonest.

From contributor D:
I would look very carefully at what the bookkeeper was doing. If it was an honest mistake, train her to do it correctly. If it was dishonest, press charges. As for the installers, you may have to think about getting new ones, because when these guys find themselves working for the correct wages, they may become very unhappy and move on.

From contributor N:
In a company your size, I would presume that you sign the checks. This is where you have the opportunity to catch any anomalies that seem out of sync with your understanding and feel of the business. Or, if you are not signing the checks, then you should be reviewing financial data at least quarterly and investigating any anomalies. I feel the only person ultimately responsible for this error - and I can imagine the pit in my stomach if I realized something like this happened to me - is you. I feel that your bookkeeper should be commended, you should apologize to her for not catching the error yourself, you should also apologize to your employees for paying them incorrectly, and then make whatever administrative process changes you need to, to avoid any similar type mistakes in the future.

I would also take a look at the employees who benefited most from this error without saying anything. I feel confident that my employees would let me know immediately if they were significantly overpaid; if they didn't, I'm not sure they're the kind of coworkers I want around.

From contributor S:
20k over 5 years is not bad. Here are some words of wisdom. Top executives should rate their subordinates on loyalty and competence. Those who are more loyal than competent should be fired, because they are the dangerous ones. They will stay forever while other more competent, less loyal people will jump ship as problems develop. And the loyal, incompetent subordinates will “protect” their bosses from the truth. Reality will be too threatening and ugly. When truth dies, really bad things happen.

From contributor R:
Nobody should be punished and your opinions of these folks should not change. Except for your view of your office manager - she made a mistake but she brought it to attention, something that in today's society is commendable, because a lot of people would never do that. It's hard for humans to admit when they're wrong and be willing to accept responsibility for it. Those who do are a better class of people. Tell her to count twice and print once and give her a raise if anything. As for the installers, it's your responsibility to put the right numbers on the check either way. And they've probably got families and the extra money more than likely had more value for them than you. (I assume you're not starving.) It doesn't really make them con artists for accepting what you gave them. They're not as righteous as can be, but definitely not scum of the earth. Just tell 'em what's been happening and their side of the story will come out. If not, you'll be on track from now on anyway. Business as usual. But I'd start paying weekly, bi-weekly or monthly. Much simpler and efficient for everyone. Sh*t happens and it could be worse. Bigger and more expensive mistakes can easily be made in much less time.

From contributor V:
These overpaid installers need to be told that you now know what has happened. And that you are disappointed at their lack of morals. Then drop it. Look for new installers and while you do… these greedy ones get no bonuses of any kind. They have already received them in advance. You as the owner must sign every check that your company writes. Signing 13 payroll checks every week takes less than 13 minutes.

From contributor W:
The most difficult, and most professional, response to this situation will require that you set the emotional piece of this aside. Are you disappointed and disillusioned? Sure. Should that be allowed to contribute to good decision-making? Nope.

If your office manager came to you in tears, owned up to the mistake, took responsibility for the error without blaming anyone else, then she's already punished herself more than enough. If you want to be a good leader as well as a good manager, let her know that as the shock faded, you realized that you really appreciated her honesty, and your trust in her just went up. Deal with the training/competence issue if there is one. But unless there is something you're not describing, if you respond in this fashion, you'll have a hardworking, focused and loyal office manager for a very long time.

With regard to the two installers, let them know without any judgmental message at all that there was a payroll processing error that overpaid overtime for the past five years. If they have questions, have your office manager explain the processing error to them. And then drop the issue completely. Why? Because we all know that the most severe challenge facing businesses of all sizes is finding and retaining competent employees. If you've had these guys for five years, you're already doing more than just something right.

I would suggest using your accountant at least once a year to take a look at your processes and provide a set of reviewed financials. Your accountant/tax planner is a business partner who can review this sort of process for you easily and in very little time. Worth every dime.

You've got the opportunity to demonstrate that you're a great guy to work for. There's no way to recoup the cash lost over the past five years, but you can turn it into an investment in continuing to build a great place to work.

From contributor M:
I think that you should have a written policy and discuss this as a current change for the new year. No need to bring up what happened - just clarify the future. There is no point to relive the past, you can only learn from it. If necessary, you may ask yourself if you have current software for bookkeeping. There are also plenty of community colleges where one can take a refresher course in accounting software.

From contributor P:
I agree with contributor W's response. I'm a Human Resources Manager for a manufacturing company (have loved woodworking as a hobby for about 12 years) and have run into overpayment situations in the past. My experience tells me that each situation has to be reviewed case-by-case. It's a very sensitive issue. Character, past performance issues, ability to know of the overpayment, etc. has to be considered/determined as the issue is investigated. Keep emotion out of it and approach it from a professional, business approach... easier said than done sometimes.

At the last company I worked (in HR), if there was no doubt that the employee knew they were overpaid, the employee was required to pay back the company. The concept was that if the company made an error in underpaying, then the employee would be made whole and the same holds true the other way. A Memo of Understanding describing the situation was signed by the employee indicating that he/she agreed that a certain dollar amount would be deducted from the paycheck each pay period. After investigating each case, the majority of cases resulted in a finding that the employee knew of or there was extreme doubt that they didn't know of the overpayment.

We've never had this big of an overpayment (5 years) so this one is even trickier. This is obviously a learning for the office manager. Training is in order and an audit system should be set up to prevent this from happening in the future. I would also put a note in her personnel file or an "issues" file describing this situation and the corrective action to prevent it from happening in the future, plus any consequences in the event it does occur in the future. Documentation of the details/facts will be very helpful in the future in the event it has to come up in court for any reason... sometimes it's hard to remember everything.

I would also talk with the other employees one-on-one. Each conversation should be held back-to-back so there's no time for the first employee you talk with to get back to the other employees and get a story together. Start the conversation with a broad statement, then add details as you should... you'll know when... it's a feel thing. Tell them, without much detail, that you noticed an issue with payroll processing, then ask them if they noticed anything. Pay attention to their non-verbals... you may learn a lot if they start to squirm. Then add some more detail. Be careful not to accuse them of doing wrong. You're just trying to gather the facts through a neutral investigation.

Sometimes, employees will spill everything. Sometimes, they'll stick strong to their story even if your gut tells you they knew. Other times, it's very clear that they had no clue of the overpayment. Sometimes, not often, you'll get an offer from the employee to reimburse you. You won't know until you talk with each employee individually.

Once you complete the investigation, review all your notes and then make a decision on what to do going forward... require repayment, termination of employment, etc. These are not easy things to deal with, but unfortunately it happens. Developing good processes, training of your employees, and setting the expectation that employees need to bring to your attention any errors in their favor or the company's is necessary.

From contributor A:
From my experience, dealing with employee dilemmas needs to be kept simple and to the point. I have tried the longwinded approach conferences… seldom achieves anything, so let's see the facts:
• You're in charge – it's all your call.
• Lady should be retained. Her attitude shows integrity.
• Men… You have no proof as to their knowledge of overpayment. Doesn't matter what it looks like - lead with facts.
• You do not owe it to them to have a conference and I would not.
• Modify pay to initial agreed salary. Cut new check accordingly.
• Cover yourself by putting an ad out for more help - that’s insurance.
• When the men are paid, keep an eye on their attitude. If you see a dynamic difference, that’s either a product of there conscious knowledge of overpayment or a product of their ignorance.
• It is their obligation to question the change of wage.
• Say little to anyone.

We are employers. Our men look to us for stability in more ways than one. I don’t care what anyone says – it's all about money. Would be nice if friendships are forged. In 20 years and over 100 employees, I have only forged one. I don’t care about being my men’s friend anymore, as it hurt to much learning it was bad business. I would not discuss this with them and in your position, all you're obligated to do is pay what was initially agreed upon. Great discussion will not change the inevitable outcome.

From contributor Z:
The question isn't "What do I do with my office manager?" The question is "What do I do with me?" An employee who writes the checks should never, ever be the same one who signs them.

From the original questioner:
As I stated in my opening statement, the buck stops here. I know I am responsible for what happens at my business. I hired my office manager to manage my office and payroll is one of her responsibilities. She goofed up, but she is a valued employee, so I have decided to keep her, get her more training and set up a cross check system to made sure it does not happen again.

Now about signing checks. It is the 21st century. We do not issue paper checks for payroll, and there is no signature required. We are on direct deposit over the internet for each of our employees. However, I understand that does not release me from being responsible to make sure the time cards and deposits are done correctly. Trust me, it has been an expensive lesson and one we won't forget.
I guess the bottom line is, we found the problem, we fixed it and now we move on. Thanks so much for your thoughts on this subject.

From contributor Z:
Yes, it is the 21st century. But even in the 21st century, millions of paper checks are issued and "signed" one way or another. I very seriously doubt that your business doesn't issue any paper checks. And even in the 21st century, 19th century accounting practices are applicable.

From contributor U:
In a business class in college, I remember the story of a top exec who lost 500 million for a company. He went in to the CEO and said "I suppose you want my resignation now." The CEO said, "Are you kidding? I just spent 500 million dollars educating you!" I think you should praise your manager and keep her on.

From contributor Y:
Kick yourself in the ass for not paying attention to your business. Don't you ever have a CPA go over your books? Expect to lose your installers, as they are used to the money. Good help is not hard to find, but it's damned hard to keep.

The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor L:
Frankly, the thought of firing your bookkeeper should never have crossed your mind, at least not for more than a few seconds of irritation. I do hope you understand just how fortunate you are to have her. All she had to do was keep her mouth shut, and you would never have been the wiser. Count your blessings in her case.

As far as the workers go - I'd say nothing at all. It will serve no purpose, but to cause future friction. If one of them comes to you asking about shorter pay, have them do the correct math. They will see they are now getting what they are due. If they bring up higher pay in the past, it will be at the risk of exposing themselves for knowing they were being overpaid. They probably wouldn't want to put themselves into such a position.

Comment from contributor K:
It sounds like this is water under the bridge by this time but, I would keep the bookkeeper as long as nothing nefarious comes up with the rest of the situation. I would definitely talk, as a group, to the whole crew and let them know that a mistake had been made. Let them know what they agreed to be hired on, and that they will continue being paid at the rate, but the overtime amounts will reflect the correction from this time forward. Remind them that the extra money they all received will not be asked to be returned.

Don't get into specific amounts of pay rate or amounts received with the group. If necessary you can have additional one on one with the installers. Definitely let them know ASAP that the amount they are going to be receiving, starting with the next check, will be reduced, due to the discovered problem. That way they can budget it into their spending habits. Tell them at the beginning of the next pay period so they can work to stretch the paycheck they just received.

It wasn't that much of a change, so it should have minimal impact on a week to week basis. Keep on eye on attitude and performance, because some people won't tolerate a loss of compensation.

Comment from contributor X:
Something like this happened to me when I was on the receiving end of the extra money. I had been on a salaried job, my first, after getting out of the Army and after about 6 or 7 months working I got a phone call from personnel to drop in for a chat.

I got to the office and the personnel manager asked if I had noticed anything different about my paycheck I told him I hadn't. He then said there had been a mix-up in payroll and I was getting the salary of another employee with the same last name. We had recently had salary reviews, and my boss told me I was going to get a raise of X percent now that I was a permanent employee. I also had my check going on direct deposit to my bank and didn't really pay much attention to amounts (I was a free and easy bachelor). The personnel manager's office staff were around while this conversation was going on, and I remember they were all giving each other knowing nods of the head at my story, but it was all true.

The manager said the money would have to be paid back, and I could either pay it back over a period of time or all at once. I was getting upset that I was under suspicion, and said they should take it all back next paycheck. When the meeting ended, I think the personnel manager and his staff realized I was innocent, but it certainly shook me up.

Comment from contributor Q:
The facts are simply put forth:

a) An error was made for 5 years.
b) The bookkeeper was extraordinarily upset by it.
c) The amount of overpayment was obvious in some cases.
d) The employees did not report it.

You have several issues here.

The first is that your installers can not be trusted. Their integrity should be questioned at every turn. Who knows what else is happening but you'd better start looking at your whole operation because if they'd steal here where a paper trail is so obvious, they are likely emptying your pockets elsewhere as well.

The second issues is that while your bookkeeper showed more integrity than your installers it does not overcome her inability to handle the books; 5 years should be enough time even for a person (even those with zero knowledge of accounting) to learn to spot the mistake you said was obvious to anyone.

Your bookkeeper not only doesn't have the basic skills required but she has not exhibited the ability to learn on the job nor the pride of doing a professional job. A simple question to you like, "Does this look right?" may have ended this mistake years ago.

Her integrity, however, should make you consider training her for another job within the company, perhaps one of the installers' jobs? She sounds like the kind of employee you would want to keep when you find her the right job.

The third issue is that you sound as if you have a severe case of growing pains. You haven't yet gotten that your job has shifted from purely hands-on work to that of leader. If you want to stay with the hands-on stuff, maybe it's time for you to consider hiring a professional manager? If you want to move onto leadership and management, get yourself into training classes, discussion groups, hire a coach, etc. Just remember that you manage processes but you lead people. There's a huge difference.

Comment from contributor G:
I don't think it's right to let the employees keep the money just because a mistake was made on the employer side. I've learned that if you set the example that employees will have to pay it back, they will come to you a lot sooner. I do think 5 years is too much to go back and collect from the installers. But it's reasonable to expect them to repay part of it.

I worked for a company several years ago, where the employees had been paid double the OT rate for almost 2 years. It was a software setup mistake made by rookie bookkeepers. I caught the mistake the very first time I ever processed their payroll. The amounts didn't look right so I double checked by hand calculating them. I found they had applied the OT rate to both the time clock software and the payroll software, which resulted in it doubling up. I didn't blame the staff for having the error; after all, this is a good lesson that will help them later on in their careers. But I did hold them accountable for overstating their qualifications and experience, and mostly for lying about their cross-checking procedures.

I found it most disturbing that not one employee had come forward to state they were overpaid. I don't believe for a minute they didn't know. If they felt they were shorted, they were in the office in an instant. We made every single employee that was overpaid pay back the money. After that, employees learned to report or question any overpayments immediately. They did not want a surprise deduction from any pay they were expecting.