SUMMARY: 
I am a one-man company in Calif.  I had an employee who erroneously
got overpaid a certain amount of money.  Now he is refusing to return
the overpayment even though we have corrected all records (like W2 &
tax forms).  I have sued him in Small Claims Court and would like to
get as much documented evidence in support of my case as possible to
convince the judge.  Court date: Aug. 24, 2004

DETAILS:
The money was gradually paid over several months on his monthly
paycheck.  It is a tax credit that IRS gives an employee under the
name "Advance Earned Income Credit" or EIC.  The clerical error
happened either due to my fault or due to my payroll company's fault
(i.e. the employee was not at fault).

When the error was discovered during tax time, we had our payroll
company make corrections for all past quarters & W2.

Once IRS determined that he was not eligible for EIC, IRS billed us
for this amount.  I am requesting this former employee to pay this
money since these are employee's share of federal taxes that were
supposed to have been withheld from his salary.

IRS simply bills the employer (instead of billing the employee) since
the employer withholds taxes on the paycheck.

I found this link that shows that even the California State Gov.
(Department of Personnel Administration) will use any and all means to
recover overpaid amounts from former employees:
http://www.dpa.ca.gov/collbarg/contract/Unit14Contract99-11.htm

However, I am looking for more concrete legal information like perhaps
an actual law (California or Federal) that says that if someone is
overpaid accidentally, they are supposed to return that money.

(As we all know, IRS takes money back forcibly all the time if they
make a mistake so why can't an employer take back the money especially
if it is IRS taxes that are being taken back - not wages.)

To win 100% of this question, please provide links to CA or Federal
law that clearly spell out the law in the above context (law doesn't
have to be in my favor).  Or provide sufficient other links that give
(direct or indirect) support to my case in court (e.g. from legal firm
websites).

You could even send a link to a law that perhaps says that money
erroneously paid to someone does or does not belong to the receiver. 
Pls. note that context of the answer must be relevant to my case.

I must receive answers no later than August 23 midnight CA time.

Thanks for reading this far.

Hi democracy,

Catch Payroll Errors Early
"It seems when the company underpays an employee it hears about the
underpayment immediately. When the opposite occurs and there?s an
overpayment, in many cases the employee does not notice and/or does
not report it to management or the payroll person. When an error is
caught immediately, normally the California Labor Commissioner allows
a deduction to be made on the next paycheck. If the error is allowed
to go over a longer period of time, and a substantial amount of
overpayment accu-mulates, this can become an issue with the Labor
Commissioner. This situation casts doubts as to whether this was an
error or an increase in the employee?s pay and the Labor
Commissioner?s opinion is normally the latter, resulting in the
overpaid wages not being recoverable."
http://www.pinc.org/pages/article.asp?vrecord=222

Regards,
hummer

Dear Democracy, 

I am posting the note here, instead of as an answer, because you won't like 
the information. 

The Federal tax code holds employer's responsible for correct withholding
from their employees. If you make an error, it's up to you to make the 
corrections in a timely manner. You indicate that the errors went on for 
many months, since you had to amend more than 1 quarterly return and a W-2. 

Your employee could cite IRC Sec 3402 to support his position that this 
your problem, not his. Many employees use that to get credit for withholding
that was never taken by employers who treated them as indepdendent contractors.

I wish I could help - and give you some encouraging advice. 

But I don't think there are any laws in your favor. 

If the judge, or commissioner, grants a ruling in your favor, it will
simply be because of the math. So, make sure you have a written report
showing how much you paid, and how much you should have paid. Make sure
that one piece of paper, that's easy to follow, you can explain, 
numerically, how much you've overpaid. 

In the future, please be careful to review and reconcile your payroll
very carefully each month. At the very least, at the end of each quarter.

Good luck!

Your TaxMama-ga

Dear TaxMama,

I appreciate your time to put in the comment although it seems
inappropriate for my question.  Here's why:

1. IRC 3402 says nothing much that is relevant to my case:
http://www.ssa.gov/OP_Home/ssact/ircprov/3402.htm

2. The tax code you are referring to in which the IRS forces an
employer to pay for the employee's share of taxes if the employer
treats a worker as a contractor in violation of IRS rules does not
apply here either.  That's because such an employer has knowingly or
unknowingly, disregarded IRS's regulations about how to determine who
is an employee and who is a contractor.  Obviously, that is the
employer's fault in that case.

I have found more relevant articles in this regard just FYI:

http://www.boc.ca.gov/RRHAD.htm

"A person who has been overpaid or on whose behalf any provider or
other person has been overpaid, under this chapter, is liable for that
amount unless:

The overpayment was not due to fraud, misrepresentation or willful
nondisclosure on the part of the recipient.
The overpayment was received without fault on the part of the
recipient and its recovery would be against equity and good
conscience. "

In my case, the last line would apply to my case - "... equity and
good conscience."  Is it in equity and good conscience that the
employee not pay his fair share of taxes??

Thanks any ways.

Regards,
Democracy

Democracy,

I know it's beyond your deadline, but here is the info you needed. 
You can recoup the amount in small claims court and seek your costs,
according to this Opinion letter (that pertains to private employers).
 The law you referred to above refers to amounts of victims, which
seems inapplicable to me.

http://www.dir.ca.gov/dlse/opinions/1999-09-22-1.pdf

Cavalierlawyer