Overpayment of wages: when and how can employers recover?

Employers should be cautious when considering deducting any amount from an employee's wages: the law protects individuals against unlawful deductions of wages and this right can be enforced by an Employment Tribunal.

There are also of course employee relations issues where an employer has to request a repayment of wages, but help is available for employers who make genuine mistakes.

The law

Employees and workers are protected from unlawful deductions of wages by section 13 of the Employment Rights Act 1996 (the Act) which prevents employers making deductions unless these are:

• required/authorised by statute,
• permitted by a provision of the employment contract, or
• where prior consent has been received from the employee.

Wages are defined in section 27(1) of the Act as any sums payable to the worker in connection with their employment including any fee, bonus, commission, holiday pay or other emolument referable to the worker's employment, whether payable under their contract or otherwise. Whilst other more specific elements such as statutory sick pay are also covered, the majority of payments made by an employer will be caught by this part of the definition.

Recovery

Overpayments can occur in a number of ways; genuine payroll errors and miscalculation of bonus/commission schemes to name just a few.

The easiest solution for the employer is if they can rely upon an express provision of the employment contract which permits corrections to be made where sums have been paid in error. However, where this is not available what can an employer do?

Section 14 of the Act provides an exemption to the unlawful deduction regime and permits deductions where there has been an overpayment of wages. This therefore enables an employer to correct any overpayment through the payroll process.

Things to consider

Whilst a deduction may be lawful by virtue section 14, employers should exercise caution in relation to the manner in which the deduction is implemented. Although the law imposes no limit in respect of the amount that is to be deducted from any single payment of wages, an overly hasty recovery process, particularly where the amount concerned is significant, could lead to problems.

The employer who fails to acknowledge a mistake and simply proceeds to rely on section 14 to recover without giving notice to the employee could be a breach of the implied term of trust and confidence (entitling the employee to resign and claim constructive dismissal).

An employer should seek to agree the repayment over a period of time and give the individual enough notice to make appropriate arrangements to prepare for the deductions to be made. Employers should not apply a deduction that leaves an individual with insufficient funds for them to be able to satisfy their financial commitments.

Employers should note that this route should not be used to make variations in salary as part of a cost savings exercise. Any unilateral variation in salary by an employer is likely to result in claims for unlawful deductions and/or constructive unfair dismissal.

National minimum wage implications?

Perhaps surprisingly, national minimum wage legislation (NMW) permits an employer to make deductions in relation to an accidental overpayment, even in circumstances where the deduction leaves the individual receiving less than the NMW might otherwise permit.

A final word of warning

Any employer who seeks to recover funds should note that any unlawful attempt to recover funds will prevent it from taking lawful steps to recover later on. For example, where an employer has made an advance of wages and unlawfully deducts that sum from the last payment following the employee's resignation, it will lose the entitlement to lawfully pursue the same amount at a later date in the civil courts.

Tips for employers

• Consider whether there is a clause allowing deductions in the event of a mistaken overpayment?
• Where this is not available, communicate with the employee as soon as possible to explain that a mistake has been made and agree the deduction with them.
• Where a mistake has accumulated over a number of years the sums involved are likely to be significant. Consult with the employee to agree a schedule of deductions taking into account the individual's financial obligations and living expenses before making any deductions from future wages.
• Proceed with caution where there is any potential dispute with the employee as the section 14 exemption from the unlawful deductions regime only applies to genuine overpayments of wages. For example, if the employer is purporting to exercise a claw back clause in the contract in respect of training costs the employee may seek to argue that such a clause is not enforceable.