The legal position
If an employer overpays an employee by mistake, then the employer has the right to reclaim that money back.
The Employment Rights Act 1996 protects workers from unlawful deductions of wages. However, it does allow for an employer to recover an overpayment.
A well written employment contract should contain a clause that allows corrections of overpayments to be made, if they were made in error. The contract may set out a process. Certainly, it is sensible for business to have a policy on recovery of overpayments.
How an overpayment can be reclaimed
Ideally, an employer should first notify the employee in writing. There is no prescribed information that must be given, however, an explanation about how the error has been made, the amount of the overpayment, and if multiple mistakes were made, for how long they have been made is likely to help the employee understand how much money has to be repaid and why. It is also a good idea to propose how the money might be repaid.
The employee may be happy to transfer the money back by bank transfer. That may be in one lump sum, or in multiple instalments over a period of time.
Alternatively, an employer could deduct the amount from subsequent wages.
If the employee agrees to repay the money, then that agreement should be recorded in writing. This is sometimes called a recovery agreement.
The employer should seek to minimise the financial distress on the employee. The employee might have spent the money already, and therefore not have it available, and he or she might not be able to afford large deductions from his or her wages.
Recovering an overpayment without first notifying the employee, or doing so in a way that causes hardship could be a breach of the implied trust and confidence between employer and employee. That breach could be a sufficient reason to claim constructive dismissal.
If overpayment is significant, collecting the overpayment in instalments may be preferable.
If the employee refuses to repay the overpaid wages
The employer has the right to deduct amounts to recover overpayments. Therefore, it is likely to take this route if the employee does not agree to another solution.
However, recovering the overpayment over time, so as not to cause financial distress, is key.
If the employee has left the business
If the employee no longer works for the organisation, then it can be very difficult to recover overpayments. However, the right of the employer to reclaim overpaid wages remains.
The process should remain the same. The employer should write to the former employee setting out what has happened and a proposed means of repaying.
If a former employee refuses to cooperate, the employer might consider using the Small Claims Court (or a County Court for larger sums).
However, there are considerations before doing this.
The first is that even if the employer is successful, it is likely to have to pay its own costs. Legal costs may be significant, even in straightforward cases.
The second is that there may be a reputational risk to the employer, either if the case becomes public knowledge, or if other employees find out.
Can an employee defend a claim for repayment?
Sometimes, an employee may not be able to repay the debt. For example, he or she may have spent the money. Provided that he or she was not at fault for the overpayment, he or she has a reasonable chance of defending any claim of overpayment. His or her argument may be that he or she believed that he or she was entitled to the money the some reason, and that accordingly he or she relied on it in good faith.
Is it worth reclaiming overpayments?
An employer should seriously consider whether the benefits of attempting recovery outweigh the costs of doing so. If the sum overpaid can be absorbed by the business, it may be better to do so.
This is particularly applicable where an overpayment has been made regularly over a long period of time, or where an overpayment is discovered much later. Mistakes of small amounts tend not to be worth reclaiming. Mistakes of large amounts are more likely to be reclaimed if the error is noticed quickly.
Recovering other costs
The law regarding overpayment wages applies only where salary has been overpaid. An employer cannot use the law to recover other types of employment cost such as training costs, or property costs such as uniforms.