August 21, 2020

Recovering overpayments from employees

This post was written by: Ilinca Mardarescu

An overpayment to an employee is classed as a payment which is made in error rather than a payment that an employee is or was entitled to but which the employee may have to repay (such as holiday pay or a bonus).

Where an employer has unintentionally overpaid an employee, there are a number of options available to recover that overpayment. The most appropriate option is likely to depend on whether the employee is still employed by the employer (as well as the actual amount in question).

Employer’s ability to recover an overpayment

Ideally, an employer should have a contractual provision expressly allowing deductions from wages in the event of an overpayment. The employer can then rely on this provision to recover the overpayment where the employee is still employed by the employer.

Without a contractual provision (or other agreement), any deduction from an employee’s wages will be in breach of contract giving rise to a potential claim. Additionally, the employer will have to rely on the common law remedy of restitution based on a mistake to recover any overpayment in the civil courts. In overpayment cases, restitution prevents the unjust enrichment of the employee at the expense of the employer. However, such cases are not without their problems and Courts have been known to find that it would be unjust for an employee to repay sums which it had relied on for a long period (i.e. a monthly overpayment paid as wages into an employees’ account which the parties had not realised for some time).

Deductions from wages

In many cases, the easiest option where the employee is still employed is for an employer to recover an overpayment by making deductions from future payments of wages over a period of time. Where the purpose of a deduction is to recover an overpayment of wages or an overpayment in respect of expenses, the unlawful deductions from wages protection at s.13-27 of the Employment Rights Act 1996 (ERA 1996) does not apply.

The employer must have paid the employee more than the wages or the expenses reimbursement that are due to them.

This differs from a mistake in the employee’s contract or other document as to the amount that an employee is entitled to, where the employer pays the employee in accordance with that contract.

It does not matter why the employee was overpaid.

The purpose of the deduction must be to recover the overpayment, not some other reason.

Tax considerations

Where an employer has deducted PAYE or national insurance contributions from an overpayment, guidance from HMRC on unintentional overpayments to employees provides that employers should make adjustments to any payments due to HMRC to reflect the correct position once the employer has recovered the money from the employee. This means that the employee’s PAYE and national insurance contributions can be adjusted so that the employee pays the correct PAYE and national insurance contributions on any wages, taking into account the overpayment.

Itemised pay statements

Where an overpayment to an employee is recovered by way of a deduction to wages, this is a deduction for the purposes of s.8 of the ERA 1996, which requires each element of the deduction to be identified on an itemised pay statement.

Where a tribunal finds that any un-notified deductions have been made during the 13 weeks immediately preceding the application to the tribunal, it must make a declaration to that effect and may make a monetary award, whether or not the deduction was in breach of contract. The maximum amount of any such award is the aggregate of the unnotified deductions made during those 13 weeks.

For advice on this or any other employment-law related matter, please contact our head of Employment, Ilinca Mardarescu