Can I reclaim money if I have overpaid an employee?

It is not uncommon for a business to accidentally over pay an employee and it can happen for a variety of reasons. If it does occur, you may be wondering if you can reclaim any money mistakenly paid. Employees are protected by law from deductions from wages being made unlawfully, however, you are able to reclaim from employees in certain circumstances, like an overpayment of wages. Here, our Employment Law team go into further detail on when you can reclaim money from an employee, what to consider when doing so and how to do so staying on the right side of employment law.

In what circumstances can I reclaim money from an employee?

The protection from deductions from wages does not apply to an overpayment of wages or employment-related expenses. Your easiest solution in this situation is to make sure there is an express provision in the employment contract which permits corrections to be made where sums have been paid in error.

However, if the contract does not have an express provision regarding deductions, you are still able to recover the wages. This is due to the statutory position that an employer can recover any overpayments by deducting the additional money from future wages or salary. This means that if you make an overpayment in one pay month, it should be relatively straightforward for you to deduct it in the following month.

The position can become more complex if you have made overpayments over a long period of time, perhaps due to a payroll error, or where a one off overpayment was made some months ago and has only recently been discovered. The employee may be able to defend a claim for repayment if they were led to believe that they were entitled to the money and that, in good faith, they have changed their position in reliance on the money. This usually means they have spent it. You will be in a stronger position if a prompt discovery is made and the overpayment is quickly brought to the employee's attention.

What should I consider when recovering money from an employee?

You should exercise caution in deciding how to recover the overpayment, even though the law imposes no limit on how much can be deducted from any single payment of wages. National Minimum Wage legislation (NMW) also permits you to make deductions in relation to an accidental overpayment, even in circumstances where the deduction leaves the individual receiving less than the NMW might otherwise allow, but deducting large amounts from wages over a short time period could cause the employee to suffer financial problems.  

If you fail to acknowledge the mistake and simply recover the overpayment without giving notice to the employee, you could be in breach of the implied term of trust and confidence which could entitle the employee to resign and claim constructive dismissal.

How should I recover the money from an employee?

When reclaiming any overpayments, you should seek to agree the repayment over a period of time with the employee, and give them enough notice to make appropriate arrangements to prepare for the deductions to be made. A recovery agreement should ideally be made in writing and signed by both parties and agreed adjustments can then be made in payroll. In some cases it might be practical for you to consider writing off part of the overpayment rather than become involved in legal proceedings to recover the full amount, however, each case should be considered on its individual facts.

You also have the right to recover overpaid wages even if the employee has left the company. You should act quickly to recover the overpayment before the final salary is paid and if the final payment has already been made, an informal request seeking repayment can be made to the former employee. If they refuse, you can pursue the amount through the court, but you should consider the financial circumstances of the former employee, and legal fees may cost more than the amount being sought.

If you are attempting to reclaim an overpayment of wages from an employee, you should consider the following actions:

• Include a clause in their employment contract allowing deductions in the event of a mistaken overpayment in their contracts.
• Where this is not available, explain to the employee as soon as possible that a mistake has been made and agree the deduction with them.
• Where a mistake has accumulated over a number of years, the sums involved are likely to be significant. Consult with the employee to agree a schedule of deductions taking into account the individual's financial obligations and living expenses before making any deductions from future wages.
• Proceed with caution where there is any potential dispute with the employee as exemption from the protection the employee has from unlawful deductions only applies to genuine overpayments of wages. It cannot be relied upon for other types of repayments (e.g. training costs or workwear costs).

As previously stated, there is no uniform solution when faced with this problem and each case of overpayment and subsequent reclamation of money should be assessed on its own facts. If you have overpaid an employee and would like advice on how to reclaim this, you can contact our Employment team on 023 8071 7717 or email employment@warnergoodman.co.uk.

If you would like your contracts reviewed to include the relevant clauses discussed in this article, we can help with our Peace of Mind package.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.