TechCrunch recently reported that the software giant Microsoft made mistakes on the severances it paid to its laid off workers. As a result, Microsoft sent out letters to an unknown amount of employees asking for a repayment of the overage. This has happened before in many other companies, and it is bound to happen again in the current economic climate.  So what should a laid off worker do when his or her former employer comes knocking for the money paid by mistake?

First of all, you should look over your severance package and see how many weeks or months you are supposed to be paid.  If you do have a formal severance agreement in writing then it is fairly easy to figure out if your former employer made a mistake or not.  A formal  severance contract also makes it hard for you to keep the extra money if they did make a mistake.  You should also check if the amount of money your ex-employer is demanding is correct, because there is no guarantee that they are not mistaken about the overage.  If it is truly a clerical error the honest thing to do would be to return the money that was overpaid. If you find that you are actually not overpaid then you should respond to your ex-employer in writing with your calculations.  A professional accountant could also help here in determining  the exact amount of severance you are supposed to be getting.

It gets a bit tricky when there is no formal severance package because the severance you get is  completely arbitrary.  In this case it would just be mean spririted for a company to pay you a severance in a certain amount and then demand back a big chunk based on an error that may or may not be a mistake. It is questionable whether or not you have to pay the money back in this scenario because you are no longer an employee and the company cannot do much to you if they cannot reasonably prove that you owe them money.  It also may not be worthwhile for them to file a civil suit for a small amount of money since lawyers may cost a lot more than the money they overpaid you.

If you do end up paying money back to a former employer you should also make sure that your tax statements are adjusted correctly.  It is possible that the overpayment might add to your tax burden if your W-2 is not adjusted  for the money you repaid.

If you have already spent the money that you are supposed to pay back then it is possible to work out a repayment plan with your old company, but both parties have to agree to the plan and you should make sure you get credited for the repayment somehow.  It is tough to repay money you do not have when you are unemployed, and hopefully your ex-employer understands this.
 

The bottom line is that this is a sticky situation that should not happen at all.  I would definitely consult with some professionals about this if you are asked to pay a very large sum of money back.  If this happened to me I probably would not pay the money back  until I make sure that it was truly a mistake.  Some Microsoft employees have expressed that Microsoft should just overlook the mistake and let them keep the money.  What do you think should happen and what would you do in this scenario?