Payroll Service Provider Not Responsible for Overpayments Made to Employee

The U.S. Court of Appeals for the First Circuit has ruled that a payroll service provider was not liable for payments made to a client's payroll manager that were in excess of her salary [Ophthalmic Surgeons Ltd. v. Paychex, Inc., CA1, Dkt. No. 09-2291, 1/31/11].

The facts. Paychex, Inc. (Paychex) provided payroll services to Ophthalmic Surgeons, Ltd. (OSL). OSL claimed that Paychex had breached their contract when, over a period of six years (and with no objections from OSL), it paid Carleen Connor, OSL's payroll manager, $233,159 more than her salary, pursuant to specific instructions from Connor. Connor regularly directed Paychex to deposit more money in her personal account than required by her base pay. During the pay periods when Connor requested more than her base pay, she requested that Paychex split her pay into two direct deposit payments. At some point, a Paychex representative told Connor that issuing her more than one payment for a given pay period was more expensive for OSL. Connor stated that she wanted to split her checks because a single larger check would result in a larger tax withholding. Paychex did not contact anyone at OSL to verify Connor's request.

All reports from Paychex confirming the weekly payroll figures went to Connor for approval, and OSL did not uncover the scheme until a new employee took over as payroll manager.

The contract. The contract between Paychex and OSL stated that “Paychex is authorized to draw from Client's bank account as specified by Client, such amounts as are necessary to pay its employees.” OSL contended that the district court that granted summary judgment to Paycheck erred by finding that the above sentence was clear and unambiguous, and by failing to give meaning to the second operative clause — “such amounts as are necessary to pay its employees.” Specifically, OSL argued that the second operative clause was ambiguous because it can be interpreted as either creating a duty for Paychex to oversee whether the withdrawals are “necessary” to pay OSL's employees, or as allowing Paychex to withdraw from the client's account “blindly” as long as the designated payroll contact person so ordered. Paychex, on the other hand, believed that OSL's interpretation of the contract language would completely negate the specific authorization to withdraw funds “as specified by Client” by requiring Paychex to question whether the requested payroll payments were “necessary” even when the client authorized them. According to Paychex, the simplest reading of the agreement was that Paychex was authorized to withdraw from OSL's account only what OSL specified was necessary to make the payroll payments that OSL requested and no more.

The ruling. The First Circuit granted summary judgment to Paychex. The court found that the contract language at issue clearly and unambiguously established that it was the client who had to specify the amounts that Paychex was authorized to withdraw from the client's bank account. The court interpreted the operative clause — “such amounts as are necessary to pay its employees” — to modify the first operative clause and to create a limitation on the amount of money that Paychex was authorized to withdraw from the client's account. The court didn't interpret this clause as creating an affirmative responsibility for Paychex to verify the amounts that the client specified.

The court also said that it was reasonable for Paychex to rely on Connor's apparent authority to issue additional paychecks in her name. It was undisputed that Connor was authorized to handle payroll and was the designated payroll contact person assigned to communicate with Paychex. Furthermore, the court noted that OSL failed to examine the payroll reports that Paychex sent. That these reports were sent to Connor's attention was not dispositive where OSL, as principal, did not convey any instructions to Paychex that it should do otherwise. The court said that if there was any negligence to be found in this case, it was OSL's own negligence in failing to properly supervise Connor.