Lost-Time Overpayment Recoupment: State Finance Law § 200 Authorizes Payroll Deductions Without a Pre-Deprivation Hearing When Amount and Liability Are Undisputed

1. Introduction

Matter of Spence v Office of the N.Y. State Comptroller (Third Department, July 17, 2025) addresses when New York State may recoup “lost time” salary overpayments from a state employee’s paycheck and what process is constitutionally required before doing so.

The petitioners were Wayne Spence (as President of the New York State Public Employees Federation, AFL-CIO, “PEF”) and Erin Miles, a PEF-represented employee of the Division of Criminal Justice Services (DCJS). The appellants were the Office of the New York State Comptroller and related state entities involved in payroll processing.

After Miles exhausted paid leave, she continued to be absent for nonwork obligations and, on biweekly timesheets, entered a “lost time” code. Because of payroll-processing speed, the state issued paychecks before HR could deduct unearned amounts, so the “lost time” code functioned as a placeholder that could later trigger deductions. Each entry generated an on-screen warning that “lost time entered may result in a payroll deduction,” which required acknowledgment.

Beginning in May 2023, respondents recouped lost-time overpayments by payroll deductions. Some deductions were large enough to leave Miles with only a few dollars in a pay period. Petitioners brought a combined CPLR article 78 proceeding and declaratory judgment action, arguing that the recoupment (i) lacked authority under the State Finance Law, (ii) was arbitrary and capricious in method, and (iii) violated federal due process. Supreme Court agreed and ordered reimbursement; the Third Department reversed and dismissed.

2. Summary of the Opinion

  • Authority to recoup: The court held respondents were authorized under State Finance Law § 200 to recover the overpayments because Miles was paid for periods when she performed no services, and she knew or reasonably should have known she was not entitled to the payments (including repeated “lost time” entries with warnings, counseling memoranda, discipline notices, an interview acknowledging lost time, and a prior 2017 recoupment).
  • Method of recoupment: The recoupment process—generally deducting in chronological order and limiting deductions to roughly nine of ten days in a pay period to preserve ordinary payroll deductions—had a rational basis and was not arbitrary or capricious despite some paycheck-to-paycheck inconsistency.
  • Due process: Applying the Mathews v Eldridge balancing test, the court found no due process violation on these facts, emphasizing that Miles did not dispute the accuracy of the lost-time hours or the amounts recouped and that requiring evidentiary hearings in such routine, undisputed recoupments would impose significant administrative and fiscal burdens.
  • Declaratory relief: The court deemed the declaratory judgment claim duplicative of the article 78 relief and unnecessary to address separately.

3. Analysis

3.1 Precedents Cited

A. Standards of review and deference

  • Matter of Brookdale Physicians' Dialysis Assoc., Inc. v Department of Fin. of the City of N.Y. (41 NY3d 608 [2024]) and Matter of Lake George Assn. v NYS Adirondack Park Agency (228 AD3d 52 [3d Dept 2024], lv denied 42 NY3d 908 [2024]) were cited for the CPLR 7803(3) framework: whether the agency acted unlawfully, committed an error of law, or acted arbitrarily/capriciously/abused discretion. These cases anchor the court’s limited role in article 78 review.
  • Matter of Carlson v Tax Appeals Trib. of the State of N.Y. (214 AD3d 1133 [3d Dept 2023]) supported deference to an agency’s statutory interpretation if rational and consistent with the statute—relevant to interpreting State Finance Law § 200 and its exceptions.

B. Substantive authority to recover unearned wages

  • State of New York v Welch-Richards (209 AD2d 847 [3d Dept 1994]) supplied the core principle that an employee is not entitled to salary for periods when no services were performed. The Third Department used it both as a statutory fit (State Finance Law § 200’s exceptions) and as a baseline fairness rationale for recoupment.

C. Arbitrary-and-capricious review of method and internal consistency

  • Matter of John E. Andrus Mem., Inc. v Commissioner of Health of the N.Y. State Dept. of Health (225 AD3d 959 [3d Dept 2024]) provided the definition of “arbitrary and capricious” (no sound basis in reason/regard to facts) and reinforced that a rational basis must be sustained.
  • Matter of Atlanticare Mgt., LLC v Ives (212 AD3d 132 [3d Dept 2022], lv denied 40 NY3d 902 [2023]) was cited for the rule that agencies should follow their own precedent on similar facts or explain departures—supporting scrutiny of whether payroll recoupment conformed to internal policy.
  • Matter of Wallon v New York State Teachers' Retirement Sys. (294 AD2d 644 [3d Dept 2002]), Page v Macchiarola (126 AD2d 713 [2d Dept 1987], lv denied 70 NY2d 602 [1987]), and Matter of Garden of Eden Home, LLC v Bassett (235 AD3d 1147 [3d Dept 2025]) were used as supporting comparisons for sustaining agency action where the administrative approach had a rational explanation, even if not perfect.

D. Due process framework and wage/property interest

  • Sniadach v Family Finance Corp. of Bay View (395 US 337 [1969]) established that wages are a protected property interest. The court accepted this premise and moved directly to what process was due.
  • Mathews v Eldridge (424 US 319 [1976]) supplied the three-factor balancing test. This was the central doctrinal tool for resolving the constitutional issue.
  • People ex rel. Neville v Toulon (43 NY3d 1 [2024]) was cited for the proposition that due process is flexible and context-specific, supporting a tailored outcome rather than a categorical hearing requirement.
  • Loehr v New York State Unified Ct. Sys. (150 AD3d 716 [2d Dept 2017], lv denied 30 NY3d 903 [2017]) was distinguished: unlike the petitioners’ relied-on cases, Miles did not earn the wages at issue, which diminished the weight of her private-interest claim in the Mathews balance.

E. Government’s fiscal interest and administrative burdens

  • City of New York v State of New York (87 NY2d 982 [1996, Bellacosa, J., concurring in part and dissenting in part]) was invoked for the Comptroller’s “unique and nondelegable duty to protect the public fisc,” legitimizing robust recoupment practices.
  • Matter of Martin H. Handler, M.D., P.C. v DiNapoli (23 NY3d 239 [2014]) supported the Comptroller’s role in preventing overpayments.
  • Matter of New York State Ch., Inc., Associated Gen. Contrs. of Am. v New York State Thruway Auth. (88 NY2d 56 [1996]) supported the view that preventing overpayments promotes the public interest.
  • Savastano v Nurnberg (77 NY2d 300 [1990]) supported the proposition that requiring hearings for each recoupment would be burdensome.
  • Rao v Gunn (73 NY2d 759 [1988]) helped frame the conclusion that additional procedures are not required when they impose burdens with no countervailing benefit to the claimant, particularly where the underlying facts are not disputed.
  • Tepper v Galloway (481 F Supp 1211 [ED NY 1979]) supported the idea that, under some circumstances, recoupment without an evidentiary hearing can satisfy due process.

F. Declaratory judgment duplicativeness in article 78 settings

  • Matter of Smith v City of Norwich (205 AD3d 140 [3d Dept 2022]) and Matter of Gable Transp., Inc. v State of New York (29 AD3d 1125 [3d Dept 2006]) supported the conclusion that declaratory relief may be unnecessary where article 78 affords the same practical remedy.

3.2 Legal Reasoning

A. State Finance Law § 200: when recoupment is permitted

The opinion treats State Finance Law § 200 as the controlling authority for state employee salary payments and overpayment recovery. The court emphasized § 200(3)’s limits on recoupment but focused on the statutory exceptions permitting recovery when overpayments were:

  1. made for a period when the employee was neither performing services nor on approved leave, or
  2. made under circumstances where the Comptroller reasonably determines the employee knew or should have known the salary exceeded entitlement.

The record satisfied both. Miles had exhausted paid accruals yet continued time off, and she repeatedly entered “lost time” (a code expressly warning it may result in payroll deduction), received attendance counseling and discipline notices, acknowledged substantial lost time in an interview, and had a prior lost-time recoupment in 2017. These facts made the Comptroller’s “knew or should have known” determination rational and supported recoupment for time when no services were performed.

B. Method of deduction: rational administration versus “perfect” consistency

Petitioners attacked the manner of recoupment—especially that deductions varied and could be severe. The Third Department treated this as a rationality question, not a proportionality or hardship review. Respondents explained (and documented) an internal approach: generally recoup in chronological order and typically avoid deducting more than roughly nine days out of ten in a pay period, so ordinary deductions (taxes, benefits, etc.) could still be processed. When the next chronological entry would exceed that guideline, payroll would skip to a later entry that fit or take a partial amount.

The court acknowledged the approach could produce “inconsistencies” and be “perhaps … imperfect,” but held it remained reasoned and fact-based—thus not arbitrary and capricious.

C. Due process: a fact-driven Mathews balance focused on “undisputed” overpayment

The critical constitutional move is the court’s framing of the case as a dispute not over whether the money was owed, but over how it was recovered. Under Mathews v Eldridge:

  1. Private interest: Although wages are a property interest (per Sniadach v Family Finance Corp. of Bay View), the court discounted the weight of the private-interest factor because Miles did not earn the wages at issue and thus had no protected interest in keeping them.
  2. Risk of erroneous deprivation and value of added safeguards: The court found minimal risk because Miles did not dispute the accuracy of lost-time hours or amounts and had confirmed the lost-time figures in an interview; multiple review layers existed before deductions began. HR misstatements about expected per-check amounts did not establish a risk of erroneous deprivation because there was no claim respondents recouped more than owed.
  3. Government interest and burdens: The Comptroller’s duty to protect the public fisc and prevent overpayments, along with administrative realities (e.g., employees using lost-time codes may leave service and litigation to recover funds can be unproductive), weighed heavily against imposing an evidentiary hearing requirement for each recoupment. Where the amount is undisputed, the court saw “no apparent countervailing benefit” to additional procedures.

The holding is careful to describe the matter as a “unique case,” signaling that the court is not creating an across-the-board rule for all wage-recoupment settings, but it nonetheless provides a concrete template: when the employee does not dispute liability or computation, and internal review exists, payroll deduction recoupment can satisfy due process without a pre-deprivation evidentiary hearing.

3.3 Impact

  • Stronger operational authority for payroll recoupment of “lost time”: Agencies may treat “lost time” as paradigmatic State Finance Law § 200(3) exception territory—time when no services were performed—and can rely on employee-entered codes and warnings to support the “knew or should have known” element.
  • Due process arguments will turn on whether the debt is disputed: The opinion suggests that due process challenges are far weaker when the employee does not contest (i) the hours, (ii) the calculation, or (iii) entitlement. Future petitioners may attempt to create factual disputes over accuracy, approval status, coding errors, or notice to increase the “risk of erroneous deprivation” factor.
  • Internal policy disputes framed as rationality, not strict compliance: The court accepted that multiple manuals existed and deferred to the agencies’ explanation of which applied, emphasizing rational administration over rigid percentage caps, especially where statutory exceptions apply. Agencies, however, should expect that unclear or conflicting manuals will be litigated; this decision rewards detailed affidavits and documentary support.
  • Limits of Supreme Court intervention in payroll administration: By reversing reimbursement and dismissing the petition, the Third Department signaled that courts will not readily second-guess recoupment mechanics under article 78 where a rational basis and documented process exist.

4. Complex Concepts Simplified

“Lost time” code
An employee time-entry designation indicating hours not covered by paid leave and not worked. Because payroll may run before HR can dock pay, the employee may initially receive a full paycheck, with later deductions to correct the overpayment.
State Finance Law § 200 (overpayment recoupment)
A statute governing state salary payments and when the state may recover salary overpayments. It generally restricts recoupment but allows it when the employee did not work/was not on approved leave, or when the employee knew or should have known they were overpaid.
CPLR article 78 review
A procedural vehicle to challenge administrative action. The court does not decide what it would do in the first instance; it asks whether the agency acted unlawfully, made an error of law, or acted arbitrarily/capriciously.
“Arbitrary and capricious”
A decision made without a sound reason or without regard to the facts. If the agency’s approach is rational, it is upheld even if another approach might seem better.
Procedural due process (Mathews balancing)
A test to decide what procedures are required before the government takes property: weigh (1) the individual’s interest, (2) the risk of error and value of additional safeguards, and (3) the government’s interests and administrative burdens.

5. Conclusion

Matter of Spence v Office of the N.Y. State Comptroller reinforces that New York may recoup “lost time” salary overpayments under State Finance Law § 200 when an employee was paid for time not worked and knew or should have known the pay was unearned—especially where the employee repeatedly entered “lost time” codes with on-screen warnings and received attendance counseling.

The decision’s principal precedential contribution is its due process analysis: applying Mathews v Eldridge, the Third Department held that, in a setting where the employee does not dispute the hours or amounts and the state has a review process, payroll deductions to recover unearned wages can satisfy due process without requiring a pre-deprivation evidentiary hearing. In practice, the case shifts future litigation toward whether a genuine factual dispute exists over entitlement or calculation—and encourages agencies to document their internal recoupment methodology to survive “arbitrary and capricious” review.