What happens when employers overpay an employee and how can the monies be returned correctly? 

The Welsh press recently reported a criminal conviction of a mother-of-five who received an overpayment of £10,000 in one month – and spent it all. She was the sole breadwinner in her family and her employer noticed the discrepancy within a matter of days, contacting her about it.

She agreed to pay it back in instalments, but nonetheless the employer contacted the police. The matter went to court and the judge convicted and sentenced her to a two-year community order with 240 hours community service. A different judge could have given a custodial sentence, but the in this case they said it would “achieve absolutely nothing” and be “unnecessary and uncalled for”.

What options does an employer have when overpaying an employee?

The first thing to do is to check the employee’s contract. Most employers should have provision in their standard contracts of employment expressly allowing deductions from wages in the event of an overpayment. If it does, then an employer can rely on this to recover the overpayment from the employee’s wages whilst they remain employed.

However, even where there is a ‘contractual deductions from wages’ clause, overpayments should not be taken by deducting from certain types of payments – such as expenses, statutory redundancy payments or payments in lieu of notice. To do so would entitle the employee to bring an ‘unlawful deductions from wages’ claim.

Even where a contractual provision enables an employer to deduct from wages, it is advisable to discuss the matter with the employee and ensure that they are made aware that a sum will be deducted from their wages each month. Setting out a payment plan for the employee will help to avoid confusion and conflict. 

Deciding how much to deduct each month

Too much could cause hardship – forcing the employee to resign and get paid employment elsewhere, subsequently leaving the employer in a worse position for recovering the money.

Deducting in smaller amounts may not be an option for small employers – and could mean that the employee leaves before the whole payment is recovered. These matters are usually best dealt with by a discussion with the employee and a reasonable approach.

For employees on low wages, deductions may technically take the employee below the National Minimum Wage (NMW), however, there is specific provision in the NMW Regulations that, where a deduction is made to a worker’s wages to recover an overpayment, this is ignored when calculating whether the worker has received the NMW. 

If there is no contractual provision allowing the deduction from the employee’s wages, then any deduction from the employee’s wages will be a breach of contract for which the employee could bring a claim in the civil courts. Although it may be possible for the employer to counter claim or claim ‘set off’ (to eliminate or reduce an employer’s liability for breach of contract), such action could still leave the employer out of pocket.  

In this scenario – or where the employee has left employment – an employer can instead make its own claim in the civil courts to recover the money. It is best to act quickly once the overpayment has been identified, to avoid the employee being able to use a defence called ‘change of position’.

In short, the longer the delay between the overpayment and the discovery of the mistake, the harder it will be for the employer to recover the money. Statutory limitation periods will also apply, and advice should be sought immediately.

Additionally, one final point to consider is the importance of an employer dealing with overpayments consistently to avoid discrimination and possibly even constructive unfair dismissal claims.


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