Before we begin to address the issue, the first question you need to answer is why the team member was overpaid. Typically, there are two main reasons why this happens:
- The team member didn’t perform their duties and is therefore not entitled to the full wage issued.
- The overpayment is due to a clerical or administrative error on the part of management or payroll.
Let’s take a look at both scenarios in detail and offer advice on how to deal with each.
Overpayment scenario A: team member failed to perform duties
Some examples of this may include a team member who takes payroll vacation pay in advance of earning it. Perhaps they’ve been with the company for less than a year but have been approved to take their full vacation time all at once, in advance of full accrual. But then, after borrowing against future vacation pay, they serve their two weeks notice. What happens to the unearned payroll vacation pay?
The first thing you should know is that you can’t regain the EI or CPP deductions you’ve already deducted on overpaid vacation wages, nor can you adjust the employee’s T4 to reflect the reduction in pay, even if you successfully recoup the earnings. For this reason, if you are asking for the team member to pay back the overage, you are encouraged to request that they return the gross pay, rather than the net.
Naturally, you may fear that you’ll never see that money again, especially after an employee leaves the company. But, if the team member left on good terms with the company, a letter stating how and why the error was made, along with how they can pay back the overpayment, is the best way to go. If that is unsuccessful, and you decide to take legal action, having a record that you gave the employee the chance to pay back the amount will help.
Overpayment scenario B: administrative and/or clerical errors
What happens if the payroll department accidentally overpays a team member? What if there is a payroll vacation pay error? The difference between this type of error and the last is that you’re required to correct and reissue the team member’s T4 form. The amount of the overpayment should be deducted from the total income listed on the T4, unless the following conditions are true:
- The employee promised to repay the overpayment and did not
- The employee refuses to pay back the amount
- The employer chooses to overlook the error and the employee keeps the payment
- The overpayment was a matter of collusion between the employee and the employer and the employee does not give back the overpayment
In all of these circumstances, you are still required to list the overpayment amount with employment income for that year.
What if the team member pays the amount owing within a year?
If the team member ends up paying back the amount owing within the year of the error, they’re only required to pay back the net total (provided that you can adjust your remittances before the end of the year). Otherwise, the team member should pay back the gross amount —specifically if you can’t recoup your deductions.
Legal Rights and Regulations for Canadian Provinces & Territories
Perhaps you’re worried that asking a former team member to pay back overpayments on wages and vacation pay is easier said than done. What are your rights as an employer? The answer depends on your provincial and/or territorial jurisdiction.
- The employer requires written permission (including the specific dollar amount) from the employee before any wage reduction is made.
- For overpaid vacation pay, written permission is also required, otherwise, it can be classified as a “gift” by the employer.
- The employer must receive written permission from the team member which states the exact dollar amount that is to be repaid.
- Overpaid vacation pay can be deemed a “gift” by the employer. Otherwise, they’ll need the same written permission from the employee in order to deduct holiday pay.
- The employer has the right to deduct the overpayment without written consent from the team member, but they are cautioned to act as soon as they notice the error. Failing to do so can be seen as the employer agreeing to the new wage.
- New Manitoba legislation states that an employer may only deduct an employee’s overpaid vacation pay up to 30 percent of their net total.
- The employer may deduct a team member’s pay within one year of the error being made.
- No written consent from the team member is required for regular wages, but the employer is required to have a written and signed policy stating that these same deduction rules extend to vacation pay.
Newfoundland & Labrador
- An employer is free to deduct overpaid wages and vacation pay. There are no further rules or regulations at this time.
Northwest Territories & Nunavut
- For both regular wages and vacation pay, written approval from the team member is required in order to deduct the overpayment.
- The employer is permitted to deduct a team member’s regular wages, but not to the point where doing so would put the team member below the minimum wage.
- For vacation pay, the employer is required to have a written and signed policy in place beforehand stating that they are permitted to deduct overpayments. Otherwise, the team member has a legal right to complain to the Ministry of Labor and Workforce Development.
- Regular wages may be deducted, but vacation pay requires written approval from the team member.
Prince Edward Island
- The employer may deduct the overpayment within the next few pay periods, or if given written consent from the team member.
- At this time, there is no constraint on the deduction of overpaid vacation wages.
- If the employer can prove that an overpayment has been made, they are allowed to recoup the wages without the team member’s consent.
- The employer must get the employee’s written approval in order to deduct vacation pay.
- The employer must recoup the pay within the next few pay periods.
- The employer is required to have a written and signed policy in place beforehand stating that they may deduct overpaid vacation hours.
- The team member’s written consent is required for a company to recoup overpaid wages and vacation pay.
After successfully receiving the repayment, what's next?
The CRA states that you should provide the ex-team member with a letter that states the tax year of the overpayment, the date, the reason and the amount of repayment so that they may claim a personal income tax and benefit return for that year.
In sum, it’s important to know where you stand as an employer in the case of any major or minor payroll errors. Make sure that if you have made a mistake, you catch it early and act quickly to avoid further complications for yourself and the team member.