Employee funds used to pay for Benefit that was supposed to be Employer-funded

[gcirish2000]

My company's HR department recently discovered a clerical error within the employee benefits administration tool we use. Apparently when the system was set up, it was incorrectly set up to deduct the cost of what was intended to be an employer-sponsored benefit from the employees' salaries instead of paying the costs for the benefits out of employer funds (the benefit was disability insurance, so it was very small amounts per pay period). This setup remained in place for an extended period of time, during which neither the employees nor the employer noticed the discrepancy/error. The issue was recently discovered and corrected, but now the question has been posed as to whether the company is legally required to return those incorrectly withheld funds to all the employees from whom they were incorrectly withheld. I believe the answer to this question is yes, the employer is in fact required to return those funds, but I was hoping this community might be able to provide more clarity on this issue? For reference, the company and most of the employees are located in Georgia if that impacts the responses. Thank you in advance.

 

[FlyingRon]

I guess it depends what you mean by "intended." If it was communicated with the employees that this was a paid benefit, then the employees should get reimbursed for the premiums. Note that the benefit is taxable, so you likely still owe tax on the premium.

 

[gcirish2000]

I guess it depends what you mean by "intended." If it was communicated with the employees that this was a paid benefit, then the employees should get reimbursed for the premiums. Note that the benefit is taxable, so you likely still owe tax on the premium.

Yes, it is my understanding that the employees understood the benefit to be an employer-paid one.

 

[Zigner]

Yes, it is my understanding that the employees understood the benefit to be an employer-paid one.

How did not a single employee realize they were paying for the benefit and bring it to the attention of HR during that extended period of time?

 

[adjusterjack]

the question has been posed as to whether the company is legally required to return those incorrectly withheld funds to all the employees from whom they were incorrectly withheld.

Who is posing the question?

What is the employer saying? I'm guessing no, or you wouldn't be here.

How long, exactly, has this been going on? Months? Years? If the employer has been deducting the premiums as a business expense while collecting them from employees, he could have a serious problem with the IRS and the state.

How many employees does the company have?

Was this benefit a pre-hire inducement for employees to work for the company? In other words "Come to work for us and we'll pay for your disability insurance."

I really don't know whether the employer is required by law to return the money but it does seem to me to be wages wrongfully withheld so I'm leaning toward yes.

Stick around and see what our HR person has to say.

 

[PayrollHRGuy]

I can't think of any law that would state that the employer had to repay the employees. That doesn't mean that in a suit against the employer the employees wouldn't win.

 

[gcirish2000]

I can't think of any law that would state that the employer had to repay the employees. That doesn't mean that in a suit against the employer the employees wouldn't win.

My inclination was that it could be considered wage theft on the part of the employer?

 

[gcirish2000]

How did not a single employee realize they were paying for the benefit and bring it to the attention of HR during that extended period of time?

I cannot answer that other than to say that obviously the amounts being deducted were small enough not to be missed, and clearly the employees were not checking their payment statements carefully

 

[cbg]

Having been on (simultaneously) both sides of the desk on a similar issue, this is not as simple a question as it appears; it's not a black and white, yes or no answer, and it can be months if not years for a complete resolution. If this is a recent discovery, it's quite probable that HR and higher management are still investigating the requirements and possible fixes. Do not assume that because no one has spontaneously offered payment, no one is doing anything about it. I can pretty much guarantee you that there is a great deal of discussion going on at very high levels, with the IRS, with any affiliated Georgia state agencies, and with legal counsel, as to the potential responses and the ramifications thereof. It will NOT be considered wage theft, so get that right out of your mind. STD/LTD can be both an employer and an employee paid benefit as far as the law is concerned, so nothing illegal has transpired. At best you may have a breach of contract. You have not won the lawsuit lottery here. You may or may not eventually get the deductions back, but you're not going to get a quick or easy fix - not if your employer is doing it right.

 

[PayrollHRGuy]

My inclination was that it could be considered wage theft on the part of the employer?

There would have to be intent for it to be theft.

 

[gcirish2000]

Who is posing the question?

What is the employer saying? I'm guessing no, or you wouldn't be here.

How long, exactly, has this been going on? Months? Years? If the employer has been deducting the premiums as a business expense while collecting them from employees, he could have a serious problem with the IRS and the state.

How many employees does the company have?

Was this benefit a pre-hire inducement for employees to work for the company? In other words "Come to work for us and we'll pay for your disability insurance."

I really don't know whether the employer is required by law to return the money but it does seem to me to be wages wrongfully withheld so I'm leaning toward yes.

Stick around and see what our HR person has to say.

HR is posing the question. I work for a company that acquired the company described in the scenario, in the legal department, but I do not specialize in employment law, so am looking for guidance as to how to advise HR to proceed. Most likely will simply refer them to external employment law counsel, but was hoping to get some insight into the potential issues at play here before doing so. The issue had been occurring for about two years before it was noticed and corrected. To my knowledge, the benefit was not used as a pre-hire inducement.

 

[cbg]

HR needs to discuss with local counsel and the IRS. The issue is quite complex in that employer paid vs employee paid, while both are legal, do affect the tax liability of the the benefits on payout, not to mention potentially affecting the employee's Federal and state taxes depending on whether the deduction was pre or post tax. Getting back the deductions might mean that the employee now owes new taxes that they didn't owe when the benefit was employee paid. It is FAR too complex for a message board to be providing guidance. Get thee to an employment attorney, now.

FYI - the case I was involved with involved a high enough profile employer so that the situation made the national news. It was over two years before the resolution was eventually concluded.

 

[gcirish2000]

HR needs to discuss with local counsel and the IRS. The issue is quite complex in that employer paid vs employee paid, while both are legal, do affect the tax liability of the the benefits on payout, not to mention potentially affecting the employee's Federal and state taxes depending on whether the deduction was pre or post tax. Getting back the deductions might mean that the employee now owes new taxes that they didn't owe when the benefit was employee paid. It is FAR too complex for a message board to be providing guidance. Get thee to an employment attorney, now.

FYI - the case I was involved with involved a high enough profile employer so that the situation made the national news. It was over two years before the resolution was eventually concluded.

Appreciate the personal insight and recommendation. Based solely on the few responses here, the issue clearly involves enough complexity to be referred to outside counsel. Thank you all for your responses.