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How to Respond to an Employer’s Claim of Overpayment

October 12, 2020 by Hien Nguyen

You’ve likely seen the situation before. The public employer makes an error in calculating an employee’s paycheck causing the employee to be overpaid. When the employer figures out the mistake, it attempts to recoup the money from the employee who had no idea he was being overpaid because his paycheck looks like it was written in a foreign language. Inevitably, the employer will attempt to recoup the funds, often claiming it is compelled to do so by California Constitution Article XVI, Section 6, which prohibits gifts of public funds.

Although there is no dispute that an employer generally has the authority to recover funds paid in error, employers wishing to collect mistaken overpayments must do so within the law. Importantly – an employer is generally not allowed to unilaterally, without an employee’s consent, deduct from an employee’s paycheck to recover overpaid funds. (Barnhill v. Robert Saunders & Co. (1981) 125 Cal.App.3d 1, 6.) As the Barnhill court explains, “[p]ermitting [an employer] to reach [an employee’s] wages by setoff would let it accomplish what neither it nor any other creditor could do by attachment….”(Id. at p. 6.)

However, this issue can be further complicated by language in an MOU which purports to grant the employer the ability to unilaterally deduct from an employee’s paycheck.

Labor Code section 221 provides, “[i]t shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee.” There is an exception to this rule contained in Labor Code section 224 for certain unilateral deductions authorized by a collective bargaining agreement. However, as the Public Employee Relations Board (“PERB”) explained in Berkeley Council of Classified Employees v. Berkeley Unified School District (“Berkeley Council”) (2012) PERB Decision No. 2268, this exception is limited: “[t]he only exception [to Labor Code section 221] permitted solely on the basis of an express authorization in a collective bargaining or wage agreement is a deduction for health and welfare or pension plan contributions.” (Id. at p. 9.)

Public employers may contend that Social Services Union v. Board of Supervisors (“Social Services”) (1990) 222 Cal.App.3d 279 supports their position. In that case, the employer authorized a resolution increasing the health insurance premiums for those electing dependent coverage and, when impasse was reached during collective bargaining, the employer unilaterally deducted retroactive payments from employees who were still electing dependent coverage. (Id. at p. 283.) The Social Services court held, “[u]nder the circumstances presented here, public policy would not be promoted by limiting the [employer’s] recourse to the filing of individual lawsuits against each of its affected employees. (Id. at p. 288.) In reaching its decision, the court cited to Labor Code section 224 which, according to that court, “expressly authorizes agreements between public employees and their employers for the payment of health care costs through payroll deductions.” (Id. at p. 287.)

It is important to realize that Social Services does not apply to unilateral deductions for paycheck errors. That case merely permitted payroll deductions for health care costs when expressly authorized by an agreement, a limited purpose expressly provided for in Labor Code section 224.

Thus, in a recent case in Los Angeles County Superior Court, RLS sued and obtained a judgment in favor of two individuals against whom the employer had unilaterally deducted from their paychecks an alleged overpayment pursuant to an MOU provision. The Court stated in its decision, “[i]n sum, the general prohibition of section 221 applies to the overpayments, section 224 provides no applicable exception, and [the agency has] a ministerial duty to comply with section 221 by pursuing the collection of overpayments through the Wage Garnishment Law.” Moreover, in pursuing such collection efforts, agencies must be mindful of relevant statutes of limitation, including the three-year statute of limitations in Code of Civil Procedure section 338 for mistake.

About the authors
Jacob A. Kalinski is the lead partner of the firm’s Labor Litigation Group in southern California, where he oversees the firm’s representation of employee associations and individual clients in various types of civil litigation. He is also an experienced negotiator, having negotiated numerous collective bargaining agreements to improve clients’ wages and working conditions.

Brian P. Ross is a senior associate with the firm’s Labor Litigation Group in southern California. Brian’s practice primarily involves writs of mandate, appellate litigation, and general labor and employment legal issues.

Filed Under: Bulletins Prior to RLS Tagged With: brian ross, Jacob A Kalinski

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