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Handling Payroll Overpayments

Close up of hand of one person giving money to another person

Back in my days of doing payroll, one of my least favorite things was making an error with an employee’s pay or not catching such a mistake. In most instances, the error was small and could be easily corrected during the next payroll cycle. But what happens when an employee is accidentally paid a higher salary for several months or even several years? Recently at MRSC, we received several inquiries asking how overpayments to employees should be handled.

The Gift of Public Funds Doctrine

 Article 8, section 7 of the Washington State Constitution prohibits any local government entity from bestowing a gift or lending money, property, or the entity’s credit to a private party, including local government staffmembers. If a staffmember was paid more than their salary provided for, the extra pay would be considered a gift of public funds if the wages were not recovered.

One of the common questions we get regarding payroll overpayments is if there is a statute of limitations for how far back a local government may go in order to recover overpayments. Under Article 8, section 7 any overpayment of employee wages would be considered a gift of public funds if not recovered. As such, MRSC has long advised that the entire amount of any overpayment of wages should be recovered from the employee.

The Statutory Process

Once an overpayment has been discovered, local governments must follow the process outlined in RCW 49.48.210. This process requires an employer to provide written notice to the employee, with the notice addressing:

  • The amount of overpayment,
  • The basis for the claim, and
  • A demand for payment within 20 calendar days from when the employee receives the notice.

The statute also outlines the procedures available to employees to contest the overpayment claim. If the employee is covered by a collective bargaining agreement, the employer must provide written notice that includes the amount of overpayment, basis for the claim, and the rights of the employee under the collective bargaining agreement. Any disputes by employees covered by a collective bargaining agreement must be resolved following the grievance procedures outlined in the agreement.

Options for Recovering Overpayments

RCW 49.48.200 allows local governments to recover overpayments of wages to employees through deductions from future payroll payments. Deductions may not exceed 5% of the employee’s disposable earnings in a pay period, although the statute also allows an employee to voluntarily choose to make payments that exceed that percentage.

If an employee is leaving employment and still has a balance outstanding, the amount still outstanding may be deducted from the employee’s disposable earnings of their final paycheck. Local governments may also recover overpayments of wages through civil action.

The statute also allows a local government and the employee to agree to a different amount for deductions (e.g., more than 5%) or to use a method of repayment other than deduction from wages.


When I was new to payroll and made a mistake, I would add reminders in my payroll processing checklist to avoid making the same mistake in the future. To avoid overpayment of wages, especially among larger agencies, I recommend sending reports to managers after each payroll for their review, as well as conducting a thorough review of salaries on a quarterly basis.

If you have questions regarding overpayments of other payroll questions, please reach out to MRSC. You can also visit the following webpages for more information:

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

Photo of Eric Lowell

About Eric Lowell

Eric Lowell joined MRSC in December 2020 as a Finance Consultant. He has been involved in local government finance for over 13 years, including working in city government as well as for a special purpose district.

Eric received a B.A. in Secondary Education from Arizona State University and a B.S. in Accounting from Central Washington University.