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It’s not as uncommon as you might think for employers to accidentally overpay their employees, particularly new recruits. Though employees are quick to notice an underpayment, they’re less likely to report an overpayment, especially a small one. However, whilst the mistake may be small, over time it can really add up and will ultimately have to be repaid by the employee, which can create ill-feeling. So, what can employers do to mitigate or rectify an overpayment?
Keep it transparent

Section 14 of the Employment Rights Act 1996 enables an employer to correct any overpayment through the payroll process. It’s important that this is accompanied by proper communication and transparency between the employer and the employee. Even if the overpayment mistake is caught by the payroll department before it’s noticed by the employee, it’s good practice that the employee is given notice of the repaid amount to retain mutual trust and respect between both parties.

Tick tock, tick tock

If an employee is overpaid, it’s critical that the employer revisits the work contract to see if there are express terms on how an overpayment and repayment must be handled and the timeframe in which overpayments must be repaid. There will always be an implied duty for an employer to act reasonably towards their employees and it’s important for an employer to make any deductions within a reasonable timeframe. If an employee has changed their position, i.e., spent the overpayment money and a long time has passed, it may be unreasonable for an employer to deduct from future wages.

Don’t forget to double check

Payment mistakes are often only spotted by employers when calculating an employee’s final salary once they have handed in their notice. Once an employee has left the company it’s more complicated, as employers lose the ability to take direct payments from their salary to repay the amount that was overpaid. This can lead to legal action and a possible court battle, although employers are better off trying to negotiate a flexible repayment plan.

Get it in writing

An ideal contract would include clear statements on what will occur in the case of repayments:

  • Employees will be notified, in writing, breaking down how much they were overpaid and what the next course of action will be
  • Once the employee is notified of the overpayment, it’s required that they pay the employer back. However, how they pay the employer can be dependent on how much is owed and what a realistic timeline would be for both parties
  • If the employee refuses to repay what is owed, the employer is allowed to take legal action

It’s important for employers to consider that, if they decide to take legal action against the employee, the fees could end up being more than what the employee originally owed. So, it’s always advised to be sensible and respectful when going through the repayment process to avoid involving the courts.

Overpaying employees is an easy mistake to make. It can be very costly and a real legal headache for the employer. There are laws in place to protect an employer’s right to repayment, along with rules and guidance on transparency. The best way to prevent the hassle and fallout from overpaying employees is to have concrete agreements written into each contract and to check the payroll on a regular basis. It’s better to prepare for a problem before it’s allowed to begin.

Michael Jenkins, Head of Legal Advice, Arc Legal Group

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