Employment-First Circuit Holds That A Payroll Service Provider Was Not Responsible For Overpayment Of Salary

Many employers outsource administrative functions, such as managing payroll and handling employee benefits. As such, this case should be kept in mind.

In Ophthalmic Surgeons, Ltd. v. Paychex, Inc., No. 09-2291 (1st Circuit 2011), the defendant, Paychex, Inc. (“Paychex”), had provided payroll services to the plaintiff, Ophthalmic Surgeons, Ltd.(“OSL”). OSL had brought suit against Paychex, alleging that Paychex had breached its obligations under a written agreement between OSL and Paychex (the “Agreement”) when, over a period of six years (and without objection from OSL), it paid an OSL employee $233,159 more than her salary. The district court granted summary judgment in favor of Paychex, and OSL appealed.

In general, Paychex handled its duties by withdrawing from a client’s bank account-to which the client made periodic deposits- the amounts needed to meet the client’s payroll, and then remitting the amounts withdrawn to the client’s employees as their pay. From the mid-1990s until her termination in 2006, Carleen Connor handled payroll for OSL, and was its office manager and designated payroll contact. From 2001 through 2006, in effect, Connor asked Paychex to pay her more than her salary. Paychex sent to OSL reports indicating all payments made, but these reports did not get passed Connor while she was the payroll contact. OSL discovered the excess payments when another employee took over Connor’s duties. OSL then brought suit against Paychex to recover the excesss payments, on the theory of breach of contract.

The issue in this case: what did the Agreement between OSL and Paychex provide as to Paychex’s liability for the excess payments? The Court applied New York law to interpret the Agreement. The Court said that the relevent language in the Agreement is that “Paychex is authorized to draw from Client’s bank account as specified by Client, such amounts as are necessary to pay its employees.” This language clearly and unambiguously establishes that the Client-here OSL- has to specify the amounts that Paychex is authorized to withdraw from the Client’s bank account. The second operative clause-“such amounts as are necessary to pay its employees”- modifies the first clause. It creates a limitation on the amount of money that Paychex is authorized to withdraw from the Client’s account. It does not create an affirmative responsibility for Paychex to verify the amounts the Client specifies. Thus, it was OSL’s responsibility to specify the amounts that Paychex was authorized to withdraw from the bank account.

Further, Connor had the apparent authority to ask Paychex for payroll withdrawals, and Paychex could rely on this authority to issue the excess payments. This obtains because OSL put Connor in a position from which it appeared that she had the power to authorize the excess payments, and OSL never objected to the payments that Connor authorized.

Based on the above, the Court affirmed the district court’s summary judgment in favor of Paychex.