Overpayments

In businesses operating computerised payroll systems, it is not unusual for an occasional error to arise resulting in a mistaken overpayment to an employee. This might take the form of an overpayment of basic rate pay or overtime pay or commission/bonus. The payslip is often fairly complex and employees sometimes fail to thoroughly check its contents. It can sometimes be a matter of weeks or even months before the employee or the business realise that an overpayment has taken place. In this situation, the legal question is whether the company are entitled to recover the overpayment and, if so, by what means.

In order to show that an overpayment is not recoverable, then the employee must demonstrate three things. Firstly, it must be shown that the overpayment was the fault of the company and not the employee. Secondly, it must have been reasonable for the employee not to know that they were being overpaid. Thirdly, the employee must have acted to their disadvantage or the assumption that the payment of salary was correct (for example by spending the money!). The most common difficulty for employees is the second condition since it is often obvious when an overpayment has occurred. It is not acceptable for an employee to assume that they have received a substantial increase in pay unless there is some reason to believe that this is the case.

The Employment Rights Act 1996 provides that it will not be an illegal deduction from wages to recover an overpayment from salary. This means that an employer is not prevented from deducting the overpayment from future wages or salary provided that this is done reasonably over a period of time and not done in such a way as to amount to a breach of trust and confidence in the employment relationship. The interesting point about the Employment Rights Act is that overpayments can be recovered from future wages whether or not the overpayment itself is recoverable from the employee on the basis of the three point test set out above.