What should you do if an employee is overpaid?
Even in today’s modern world, payroll still incorporates a huge amount of manual processing each month to ensure that employees are paid on time and to the correct amount. However, occasionally payroll mistakes can lead to employees being overpaid in their wages.
It’s important for employers to understand why overpayments may occur and how they can properly claim back any monies in order to prevent legal action and disputes.
Throughout this guide, we’ll explore a number of precautions an employer can take If they believe an employee has been overpaid.
What does the law say about overpayment?
The first thing you’re probably thinking is ‘can I retrieve the money that has been overpaid?’ In short, yes.
According to the Employment Rights Act 1996, employers in the UK can deduct money from future wages until the full amount of the overpayment is recovered.
The official legislation states:
“Where the purpose of the deduction is the reimbursement of the employer in respect of (a) an overpayment of wages; or (b) an overpayment in respect of expenses incurred by the worker in carrying out his employment, made (for any reason) by the employer to the worker”.
It’s also worth checking your employment contract to see whether there is a clause allowing for deductions from wages in case of an overpayment as this will make the repayment much more straightforward.
How can the overpayment be recovered?
There are two ways that you can reclaim any overpayments. Firstly, the employee can make one lump sum or secondly, they can make a series of instalments until the amount is fully repaid. As an employer, you should always provide the employee with notice and seek agreement in advance of making deductions.
A recovery agreement should be made in writing and signed by both parties to avoid any disputes or future legal action.
To summarise the stages of reclaiming an overpayment, you should:
- Contact the employee as soon as you notice they have been overpaid
- Explain the situation fully
- Tell them the repayment process and ensure they understand its implications
- Discuss whether wage deductions would cause them any financial difficulty
- Agree on a repayment method – lump sum or instalments
- Put the agreement in writing and get both parties to sign it
- Make the appropriate deduction(s) from the employees’ wages
Following this process will ensure that both you and the employee are treated fairly, and there are no surprises from either party, making it simple with limited issues.
Can you reclaim an overpayment from an employee that has left the company?
As an employer, it is still your right to ask for repayment if a person has been overpaid, regardless of whether they are still employed by your company or not.
However, it’s not as straightforward as it would be if they are still an employee. If you notice an overpayment, you need to act quickly in case the final salary payment has not yet been made as you could reclaim payment from that. If the final salary payment has been made, it becomes more problematic as the former employee can refuse your request. If they do refuse, you can consider court action. Still, any success will depend upon the financial position of the former employee and you may face large legal fees that outweigh the cost of the overpayment.
If you do consider legal action, you’ll need to gather as much information as possible about the former employee such as their current employment status to ensure that you build a case to determine whether they can potentially afford to repay you.
Can an employee defend a claim for being overpaid?
The employee can put forward a defence for any repayment claim on the basis that they were led to believe that they were entitled to the money and therefore relied on it. In most cases, this means that the employee has already spent the money and that it wasn’t the employee’s fault that they were overpaid. In this instance, they may have a defence case.
Each case should be treated on an individual basis. For example, if you discover an overpayment at a much later date, it may be more difficult for the employee to repay you. Sometimes the best course of action is to accept a partial repayment or maybe consider writing off the entire amount.
How to avoid accidental employee overpayments
As stated above, overpaying an employee is quite common due to mistakes in payroll, basic human error or even technical issues with the bank. For example, a bank may have an issue where it cannot process the salaries of your employees on a chosen day, therefore due to your contract with your employees you make direct payments instead to ensure they get paid on a certain day of the month. However, if the bank later processes the payments, you may find that you have overpaid every employee for the month.
The most common way employees are overpaid though is payroll errors. The best way to reduce mistakes in the HR and payroll departments is to implement modern payroll software that will automate the majority of tasks for you. There will still be an element of human processing, but automating certain aspects will vastly reduce the chance of any errors.
Another way to minimise mistakes is to conduct regular audits and advise your employees to notify you immediately if they have been overpaid. This may be difficult to implement unless you offer some sort of benefit such a small bonus etc.