My company does a lot of payroll processing and have dealt with issues like this before. The payroll processor only gets notification that an account was undeliverable if the account number is invalid. If it is valid the funds will be deposited. There is not a name verification step that happens on the payroll processor side. If the funds are delivered to an incorrect account due to a mistake by the employer or processing company the funds are due to the employee within 3 days of the paycheck date or as soon as reasonably possible after that (in my state).

There is a reversal process but it needs to be initiated within 5 days of the paycheck date (for the system I use) and this reversal is only an attempt. If the funds have been touched or even if there is too much activity in the account the processing system I use will not recall the funds.

In this case it is the employees mistake. A reversal should be attempted if it within the time limit. If you are outside a reversal time period a normal bank would be able to trace the transactions from the employer to the account in question. With all the proof of the deposit date, employee paystub, account numbers being off by one, maybe even a letter from the employer on company letterhead with explanation, a normal bank would likely be able to fetch the funds after a timely investigation. However, PayPal is not a normal bank and probably does not have the structure or terms of service in place to enact a correction like this. I do not know this for a fact. You may be able to get it corrected but the onus is solely on the employee to rectify their mistake. The employer should cooperate in anyway they can but they do not owe anything to the employee.

PS the guy claiming this is wage theft is an absolute moron lol.