Payment errors can sometimes occur, resulting in employees being paid more than they are entitled to. Michael Hibbs outlines how employers should approach the issue of incorrect pay, without doing too much damage to employee relations.
An NHS trust recently landed itself in hot water after it asked staff to repay a one-off Christmas bonus that was wrongfully given to them.
These types of mistakes can be difficult to negotiate, as any requests to return payments are rarely received well by employees. It is imperative that businesses act quickly and decisively, taking swift action to recover money while also managing delicate employee relations.
The two most common circumstances that lead to incorrect pay are a ‘mistake of fact’ – for example, human error – or a ‘mistake of law’ – for example an increase to the national minimum wage without the company knowing and adjusting. Regardless of how an error in payment occurs, the employer is always entitled to try to recoup the overpayment.
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Look at your employment contracts
Most businesses have deduction clauses in their contracts which mean that they can take the equivalent sum from an employee’s future pay cheque, typically to be repaid in a series of instalments.
However, an employer can also choose to take back the overpayment as a lump sum, using the employee’s entire pay if required, as correcting an overpayment is one of the exemptions listed by the law that ensures employees receive the national minimum wage.
Whilst a lump sum deduction is a legitimate option for employers, it is very unpopular among employees who depend on regular wages and would only be recommended in the case of an employee leaving the business, after which it would be impossible to recover the funds.
Deduction clauses in employment contracts mean that businesses do not have to go through the courts to recover funds, and businesses should seek to review or add in these clauses where appropriate to smooth the process should an incorrect payment occur. Equally, it is imperative that employers ensure that the affected payslips are clearly itemised and logged with HMRC to make the deduction lawful.
No deduction clause
If a deduction clause is not in place, an employer must go to court in order to recover the funds. In most cases the employer will be entitled to take the money back, but it should act quickly. If the mistake remains undetected or is not acted upon after two months, employees can present a ‘change in circumstance’ defence which could mean that they have spent the money or that their financial position has changed making them unable to repay the sum.
Incorrect payment situations can damage an organisation’s reputation if not handled sensitively, which can disrupt day-to-day operations.”
Whether a business has deduction clause in its contracts or not, maintaining good relationships with employees needs to be a top priority should a mistake occur. Incorrect payment situations can damage an organisation’s reputation if not handled sensitively, which can disrupt day-to-day operations. To avoid this, employers should be as transparent as possible about how the mistake occurred, what is being done to amend it and what steps they will take to ensure it does not happen again. Any communication about the situation should be clear and professional, and come from a person in a position of authority or the senior leadership team.
Avoiding pay errors
To prevent incorrect payments being distributed, businesses should have protocols in place for updating and checking payment information prior to funds being transferred. This means ensuring that any promotions, change in hours or overtime payments are recorded at the time and verified prior to payday, creating an evidenced paper trail.
Employers should also take steps to ensure that they are aware of changes to pay laws, such as the national minimum wage. These should be acted upon prior to the next payday.
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Diligence is imperative to avoiding any form of incorrect payment. Having measures in place to avoid them occurring will not only keep a business from potentially going to court, but will also maintain employees’ trust. If a mistake is made, solving it quickly and efficiently in a sensitive manner will be beneficial for both the business and its employees.
