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Prevention better than cure

Darren Davoile, debt recovery manager, Coltman Warner Cranston LLP

Mistaken overpayments to employees happen, but what is the best way to deal with them?

It is not unusual for an occasional error to arise resulting in a mistaken overpayment to an employee. Payslips are often fairly complex and employees sometimes fail to thoroughly check their contents. It can sometimes be a matter of weeks or even months before the employee or an employer realise that an overpayment has been paid. In this situation, the legal question is whether you are entitled to recover the overpayment and, if so, by what means.

In order to show that an overpayment is not recoverable, the employee must demonstrate three things.

- it must be shown that the overpayment was your fault and not the employees.

- it must have been reasonable for the employee not to know that they were being overpaid.

- the employee must have acted to their disadvantage on the assumption that the payment of salary was correct (for example by spending the money!).

The most common difficulty for employees is the second condition since it is often obvious when an overpayment has occurred. It is not acceptable for an employee to assume that they have received a substantial increase in pay unless there is some reason to believe that this is the case.

What are the legal issues?

The Employment Rights Act 1996 (ERA) states that it is unlawful to make a deduction from a worker’s wages unless:

1. The deduction is required or authorised by statute or a provision in the worker’s contract, or
2. The worker has given their prior written consent to the deduction.

A deduction for Income Tax and National Insurance Contributions under the PAYE system or deductions made in relation to an Attachment of Earnings Order are “required or authorised” by statute.

It is important to ensure that there is a provision in the worker’s contract which allows deductions to be made. The final way a deduction may be permitted is if the worker has agreed in writing in advance of the deduction being made.

There are exceptions included in the ERA to the basic provisions above – notably a deduction may be made in respect of an overpayment of wages or an overpayment in relation to expenses. So, on discovering an overpayment the employer may make a deduction from a subsequent month’s pay and the employee will not have a claim of an unlawful deduction from wages claim – in theory!

Another area of concern is holiday pay on termination. This situation often arises whereby the proportion of annual leave taken by a worker exceeds the proportion of the annual leave year which has expired at the date of termination of employment. The case of Hills v Chappell 2003 highlights the importance of having a clause in a contract of employment allowing you to claw back any overpayment of holiday pay on termination of employment.

Top Tips

• Remember to include a deduction from wages clause in contracts of employment and that there is a signed contract of employment.

• Carry out financial audits frequently to ensure that any errors are dealt with quickly.

• Avoid any overpayment if possible and pay in arrears.

• Sending a lawyer’s letter, if your efforts fail, will usually have a high recovery rate and are at a nominal cost compared to the amounts owed. They will flush out any dispute before you issue court action so you can then decide on your next options and consider the likely cost benefits.

• Try and resolve the dispute before you issue. You should write to the ex-employee before considering instructing a solicitor for recovery and you should expect reasonable offers of payment and regularly review them.

• Notify the ex-employee as soon as the overpayment is discovered. The quicker you chase them, the higher chances you have of a full recovery. The longer the delay, the more difficulties you will encounter in locating the ex-employee and their ability pay. It may also have adverse PR!

• Thoroughly assess if your documentation supports an action.

• Check that there is a document trail showing that notice was given immediately when the overpayment was noticed.

Posted on 22nd August 2012 by



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