What are my options if I have overpaid an employee?

Generally, where an employer has overpaid an employee’s wages, the overpayment should be repaid even if it was the employer’s mistake. If an overpayment of wages has occurred on one occasion it should be a relatively minor issue to rectify. However, if an overpayment has been made in error for an extended period of time it may become more complex, and repayment will need to be approached cautiously.

Overpaying an employee can happen due to various reasons, such as payroll errors, miscalculations, or misunderstanding. Regardless of the cause, rectifying the situation promptly and fairly is crucial for maintaining trust and compliance within the workplace.

This article discusses the options an employer has where they have overpaid an employee, and the steps that should be taken to recover such payments.

First steps

Before taking any action, it is essential to thoroughly review and confirm the overpayment. This may involve checking payroll records, consulting with relevant personnel and ensuing accuracy in calculations. Understanding the extent and nature of the overpayment will inform the subsequent steps.

Additionally, open communication is key to resolving overpayment issues amicably. Once the overpayment is confirmed, employers should promptly inform the employee in question.

Recovery options

Normally, it is not mandatory for an employer to obtain an employee’s permission to recover the overpayment where the money can be directly deducted from any wages. However, it is usually good practice for an employer to first consult with an employee before making a deduction for an overpayment of wages.

Employers have several options for recovering overpaid wages, which may include:

• Deducting from future wages. The overpaid amount can be deducted from the employee’s future wages over an agreed period.
• One-time repayment. In some cases, it may be possible for the employee to repay the overpaid amount in a lump sum. This approach may be suitable for minor overpayments or if the employee has sufficient funds to repay the entire amount.
• Negotiated repayment plan. If an employee raises financial concerns in relation to repayment, a repayment plan tailored to the employee’s financial situation may be agreed between the employer and employee. This could involve adjusting the repayment amount based on affordability over an extended period.

If an employee is unable to come to an arrangement with their employer regarding repayment, they should use the internal grievance procedure to alleviate the matter. Additionally, employees may bring a claim in the Civil Court against their employer if they believe their employer was unreasonable in recovering the overpayment.

Considerations for employers

Before implementing any repayment method, it is essential to consider legal implications and obligations. Employers must adhere to employment law when addressing overpayment issues. Key considerations include:

• Compliance with the Employment Rights Act 1996, which outlines regulations regarding deductions from wages;
• Ensuring any deductions comply with the employee’s contract of employment and are clearly communicated; and
• Avoiding unlawful deductions, which could result in legal action against the employer.

Throughout the process of addressing the overpayment, thorough documentation is essential. Employers should keep records of all communications, agreements, and transactions related to the overpayment and its resolution. This documentation serves as a safeguard against disputes and helps to demonstrate compliance with legal requirements.

Preventative measures

To minimise the risk of future overpayments and repayment conflicts, employers can implement various preventative measures, such as:

• Regularly reviewing payroll processes and systems to identify and rectify errors promptly;
• Providing training to relevant staff members involved in payroll processing to enhance accuracy and awareness of legal requirements;
• Establishing clear policies and procedures for handling overpayments, including protocols for communication and resolution; and
• Ensuring a compliant deductions clause is included in all employee’s contract of employment.

Other pay elements

If an employer offers a bonus or commission scheme, they may wonder if they have the ability to clawback such bonus or commission payments where necessary.

In order to clawback any bonus or commission payments, a clawback provision must be included in the employee’s contract of employment or other written agreement. Clawback provisions will only be legally enforceable if they are clearly stated in writing and signed by both parties before or at the time the bonus or commission is awarded to the employee. However, a clawback provision may be deemed unenforceable if the court decides it is an unlawful penalty clause or if the clawback provision is so disproportionate as to amount to an unreasonable restraint of trade.

To ensure the reasonableness of any clawback provision, it may be worth employers putting in place a recoupment agreement for any bonus or commission payments. For example, this would specify the percentage of remuneration that will be recouped on a sliding scale over specified periods of time.

Conclusion

Overpaying an employee is a challenging situation for employers, but it is not insurmountable. By promptly addressing the issue with transparency, communication and adherence to legal requirements, employers can navigate the process effectively. Implementing preventative measures can also help mitigate the risk of future overpayments, ensuring smoother payroll operations in the long run.

If you are struggling with an overpayment made to an employee, or if you need further information our Peace of Mind Team can provide specific advice and our document audit team can assist you with drafting compliant policies or contract clauses. Contact us by emailing employment@warnergoodman.co.uk or calling 023 8071 7717.