Weekly dilemma: Overpayments

I’ve just discovered, to my absolute horror, that I’ve been overpaying an employee. What’s the legal position? Can I get my money back from him?

If the employee in question is still in the business, the first and most obvious avenue to consider is recovering those overpayments from his earnings. Making deductions from wages is often forbidden under the Employment Rights Act 1996, but deductions to recoup an overpayment are happily excluded from that prohibition. However, the employee can still argue that you cannot recover the overpayments from his wages if:

  • he was led to believe by you that he was entitled to the extra cash; 
  • he has, in good faith, “changed his position” as a result (ie spent it); and
  • the overpayment was not primarily his fault.

Put differently, the overpayment may not be fully recoverable if the employee has, in good faith, incurred expenditure that he would not otherwise have done as a result of the overpayment.

The requirement of good faith is a difficult one for the employee to satisfy. How many of us would not notice a material movement upward in our wages? Salaried staff should pick it up pretty sharply. Greater difficulties arise with variable commission earners and people who may not know exactly what factors bear upon their income from week to week. If the overpayment does not take the net figure outside the normal range, then the employee might not be expected to identify it as an error.

Your answer then lies in attacking the other leg of his argument, ie that he should not have to give it back as he has spent it on something he would not otherwise have bought. If it is so big a figure that it allowed him to do that, then he will be hard-put to show that he thought himself entitled to keep it. If it is just a marginal figure that could genuinely go unnoticed, the harder it is to show that he has spent it on something special. Equally, if the employee has not spent the money at all, he scarcely suffers any prejudice from having to give it back.

In practice, where there has been only a single overpayment that is noticed relatively quickly, there should not be a problem with simply letting the employee know straight away and recovering the payment the following month. However, if the overpayments have been ongoing for some time, your employee can more easily argue that he thought himself entitled to it. In addition, if you try to recover a large aggregate overpayment in an unreasonable manner (eg by withholding so much of the employee’s salary that he struggles with bills or mortgage), then that could result in a resignation and a claim for constructive dismissal.

In those circumstances, it is advisable to aim for repayment over a reasonable period of time, rather than to recover it all in a lump sum. You should seek the employee’s written agreement to the amount and number of the deductions plus an acceptance that, if he leaves before the payments are complete, the whole outstanding balance will become due and may be recouped from salary and/or notice pay. If he refuses to agree, the attempt to agree a repayment schedule with him will weigh heavily in your favour in court.

If the employee cunningly leaves the business before the overpayments are fully recovered from his wages, you can, in theory, sue him in the County Court. Whether this is an option worth pursuing in practice or the sum better just written off to experience usually depends on the amount involved relative to the costs to be incurred, the degree to which you need to establish (or prevent) a precedent and just how embarrassing are the circumstances leading to the overpayment.

Will Bateman, associate, Manchester Employment Department, Hammonds LLP

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