I’ve overpaid an employee – what do I do now?

A few years ago, another story hit the headlines involving a Spanish civil servant who failed to turn up to work for “at least” six years despite being paid a full salary.

Although these are extreme examples, these types of cases are far less rare than one would imagine. We currently act for a number of employers who have advertently overpaid over tens of thousands to employees and have come to us to recover these sums.

In short, overpayment happens. No matter how many robust procedures you put in place, on occasions, there will be circumstances that lead to an employee receiving too much money.

What is the legal position in relation to accidental overpayments?

An overpayment, simply put, is a payment made to an employee when the employee is not entitled to the payment at the time it was made. This could occur for a variety of reasons, including: administrative error, payroll processing delay, a temporary increase in benefits not being removed again, or many other reasons.

Whilst the legal position is often clear-cut in these circumstances, actually recovering an overpayment made to an employee can often be more difficult than employers expect.

There are, broadly, two main scenarios to consider.

If the employee is still employed by your organisation

When deciding on the most appropriate course of action, the single most important factor is whether your employee is still employed by you.

If the employee is still in your employment, it will often be possible to recover the overpayment of wages through deductions to future wages. The contract of employment will often have provisions allowing for deductions from wages in the event of an overpayment. If no such provision exists in your contracts, then any deduction from wages will need to be considered carefully so as to ensure that you are not be acting in breach of contract, and open your company to claims in the civil courts and/or employment tribunal.

If the employee has left your company

The legal procedures where the employee is no longer employed by you can be slightly more complex.

The employee may be able to defend an your claim for the recovery of an overpayment on the basis that (i) they were unaware of the overpayment/led to believe that they were entitled to the money and (ii) in good faith, they relied on this additional money. In reality this will often be where they have spent it or used it to repay debts. Provided it wasn’t the fault of the employee that they were overpaid, the courts may decide that in this situation it would be unjust to require the repayment of the money.

The approach taken by the courts in these cases will be largely dependent on the individual facts of each case, such as whether the employee had noticed/queried the overpayment, whether the employee acted in good faith, and whether the employee’s actions caused or contributed to the overpayment.

Employers: take steps to protect your position

As an employer, there are steps that you can take to ensure that you are in a good position should an overpayment to an employee be made, including:

• Review contracts of employment to ensure that the recovery of overpayments through deductions from wages is included.
• Act as quickly as possible as soon as the overpayment is discovered.
• Ensure that treatment is consistent amongst employees. For example, if overpayments have been ignored in the past and then an employer seeks to recover an overpayment in relation to a woman who chose not to return to work following maternity leave, this could open the employer up to potential discrimination liability.