What are your options as an employer if there has been an overpayment of wages?
The general rule is that if an employer has overpaid an employee, the overpayment of wages should be repaid even if the mistake was the employer’s. In other words, the employer is legally entitled to recover any salary overpayment from the employee. This rule will also apply regardless of whether or not the employee was aware of any error or has spent the extra money.
Further, an employer does not technically need the employee’s permission to recover the overpayment, where the money can be directly deducted from any wages. This is because the statutory protection against unlawful deductions from wages contained within the Employment Rights Act 1996 (ERA) does not apply in circumstances where an employer has mistakenly made an overpayment.
In theory, the employer is not even required to inform an employee that these deductions will be made. However, it is usually good practice for an employer to first consult with an employee before making wage deductions for an overpayment, and for an agreement to be reached as to how repayment will take place, not least to avoid any potential conflict and to preserve the working relationship between the parties.
In this guide, we explain the rules on overpayment of wages, including the process employer should follow to reclaim any overpayment, the time within which this should be done and how to approach recovering wages after an employee has left the company.
Identifying the overpayment
It is not uncommon for employees to be overpaid at work, especially new-starters, where the incorrect salary has been entered by someone in the payroll department, or erroneously provided to payroll by the employee’s line manager.
Where an overpayment of wages is fairly small, it could go unnoticed by the payroll department, and even the employee, for several months. Further, even though employees will nearly always query an underpayment, they may not necessarily raise concerns over any overpayment, especially small ones.
That said, over time, even small overpayments can amount to a sizeable sum that must be repaid. As such, it is important for employees to immediately notify their employer or payroll as soon as they identify any overpayment of wages, even a relatively small one, to avoid the accumulation of a much larger debt.
Moreover, an employee who deliberately allows overpayments to build up is potentially exposing themselves to allegations of dishonesty. In particular, where it is apparent that an employee has sought to benefit from a genuine mistake on the part of their employer, this could even result in disciplinary proceedings.
How to recover overpaid wages
An employer does not need an employee’s permission to recover the overpayment of wages by way of a direct deduction from their salary payment, nor to necessarily notify the employee of the same, unless there is express provision within the individual’s contract of employment to do so.
Further, the employer can recover an overpayment from an employee’s wages in full, from one single pay packet, unless, again, the contract provides otherwise.
As a matter of good practice, however, even in the absence of any express contractual provision requiring the employer to approach the recovery of any overpayment in a particular way, employers should notify the overpaid employee prior to making any deductions and, in some cases, the parties may even be able to reach an agreement in the form of a repayment plan.
This can be especially important where the employee owes a large amount of money that has accumulated over a long period of time. Any failure on the part of the employer to act fairly or reasonably in these circumstances, without having regard to the potential financial hardship that immediate repayment could cause the employee, could be construed as a fundamental breach of the implied term of mutual trust and confidence.
In extreme cases, this could even result in the employee feeling forced to resign, with a potential claim for constructive dismissal, provided the employee has the required continuous service of no less than two years.
Best practice advice is to:
- Notify the employee of the fact that an overpayment has been made, providing them with an explanation as to how this has arisen, together with a breakdown, including the dates and amounts. In this way, both parties will be clear as to the reason for the overpayment and exactly what will need to be repaid in due course. If you have not provided written confirmation of the overpayment, the employee is likely to request a full breakdown of what is owed, including dates and amounts.
- Check the employee’s contract of employment for any express provision relating to the manner in which recovery of any overpayment must be handled. This will set out the process you will need to follow, including whether you can deduct payment in full from one single pay packet, or whether provision must be made for repayment in instalments.
- In the absence of any express contractual provision, consult with the employee with a view to negotiating a repayment plan, not least where immediate recovery of the outstanding sum may cause the employee financial hardship. This could even include suggesting alternative ways in which the employee can repay the amount owed, for example, by working extra shifts or staying later each day.
- Act fairly and reasonably through the process, not least given that the employee may have been wholly unaware that they have been overpaid, and is anxious and/or upset about any reclaim request. What will constitute a reasonable rate of recovery will depend on the circumstances, where one single repayment may be acceptable for a relatively small overpayment, but not for larger sums.
Is there a salary recovery time limit?
Having identified an overpayment, most employers will often act promptly in seeking to recover the amount outstanding, in some cases even opting to deduct the full amount from the employee’s next pay packet.
However, where a historical overpayment only comes to light several years down the line, section 5 of the Limitation Act 1980 provides a time limit of six years. Section 5 states: “An action founded on simple contract shall not be brought after the expiration of six years from the date on which the cause of action accrued”. In the context of an overpayment of wages, the action is founded on the contract of employment, such that the six-year limitation period will apply.
In other words, an employer will not be entitled to recover any overpayment of wages made more than six years ago.
Recovering an overpayment of wages after an employee has left
An employer is legally entitled to recover any overpayment of wages, either during the currency of the contract of employment, as well as after the employee’s contract has come to an end.
If an employee has already left their job when the employer first discovers the overpayment, whilst this complicates matters from a practical perspective, it does not affect the employer’s legal entitlement to reclaim the amount.
In particular, in circumstances where an employee no longer works for the employer, the employer will no longer have the option to make a direct deduction from the employee’s wages. In fact, in many cases, an overpayment of wages can occur in calculating the employee’s final salary.
As such, having identified an overpayment post-termination, the employer will need to request repayment from the employee. This should be done informally at first, albeit in writing. In the event that the employee refuses to repay the sum owed, it is open to the employer to take legal action against them. This would involve issuing a civil claim for recovery of the overpayment as a debt.
However, even with fixed county court costs, employers should bear in mind that the potential cost of recovering the overpayment of wages, not least in terms of the time taken to do so, could far exceed what the employee owes. Further, even where the claim is successful, if the former employee is unemployed, or on a low income, it may be unlikely that the judgment sum will be recovered in any event.
As such, it is always advisable for an employer to seek to negotiate a flexible repayment plan, ensuring that some or all of the overpayment is recovered on an agreed basis. It will also remain open to the employer to pursue the matter through the courts in the event that the employee breaches any agreement.
Recovering other monies owed by an employee
In addition to the overpayment of wages, an employee may leave their job owing other monies. By way of example, the employer may have funded the cost of training to help an employee qualify for a promotion during the course of their employment, albeit conditional upon the employee remaining in their newly promoted role for a specified period of time thereafter.
In these circumstances, an employer can only seek to recover this money, either by way of a final deduction from the employee’s salary or via the courts, where there is express provision to do so within the employee’s contract of employment, or it has otherwise been agreed in writing.
Equally, an employee may owe the employer money for something else, for example, a loan to cover the cost of a travel season ticket, or even for contractual maternity pay, where there is often express contractual provision about returning to work for a certain period of time after taking maternity leave.
However, as with the training cost scenario above, an employer can only deduct this money from an employee’s final pay if there is prior written agreement permitting them to do so. By way of example, where an employee has failed to pay off a travel season ticket prior to handing in their notice but had previously signed an agreement to say they would pay back any shortfall, the employer would be well within their rights to seek recovery of any outstanding amount.
However, employers should exercise extreme caution when seeking to deduct any outstanding debts from an employee’s final wages, as any incorrect calculations could be classed as an unauthorised deduction for which the employee can bring a claim in the employment tribunal.
As with any overpayment for wages, it is always best for an employer to first consult with the employee to clarify the extent of any outstanding monies, and to agree a sensible way forward. In this way, the parties will avoid any potential dispute over money that is not necessarily owed, or reach agreement as to how any outstanding sum will be repaid, without recourse to legal proceedings.
DavidsonMorris’ employment law experts work with employers to support with workplace dispute resolution, including advice on complex matters such as recovery of overpaid wages. Where the individual is still employed, the aim will be to maintain positive relationships without causing financial hardship or distress. Where an individual has left the company, it will be important to assess the merit of the case and evidence to support recovery, while ensuring communications are clear and effective to bring the matter to a satisfactory conclusion. Contact us for help and advice if you are facing an overpayment of wages issue.
Reclaiming an overpayment of wages: FAQs
Can an employer recover overpaid wages after the employee has left?
Employers have the right to pursue and reclaim any overpayment in wages, even after the employee has left the organisation. The recovery process is more difficult if the final salary payment has already been made, and employers would have to contact the individual to advise of the overpayment, with supporting evidence. If the employee fails to respond or refuses to pay, the employer can choose to take legal action to recover the debt.
How can an employer recover overpaid wages?
Employers should take action as possible after identifying the overpayment. This would involve raising the issue with the employee to explain how you intend to recover the money, usually by deducting from the employee's future salary payments until the amount is paid off.
How much can employer take back in overpaid wages?
Employers are allowed to take action to take back any overpayment in wages. This would usually be by deducting set amounts from the employee's future salary payments. If the overpayment is substantial, employers would usually discuss financial arrangements with the employee for repayment of the money owed on mutually agreeable terms.
How can DavidsonMorris help deal with overpayment of wages?
DavidsonMorris' employment lawyers can help with any issues relating to recovery and repayment of overpaid wages, including how to approach the issue with the employee and considerations when dealing with larger sums.
Last updated: 14 August 2022