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Recovering overpayments from employees

Updated: Feb 17

Almost every employer has been in this situation – an employee has, due to administrative errors, been overpaid and now the money must be recovered. In the simplest terms, the overpayment is a debt that can be recovered like any other debt but of course, the relationship between an employer and employee means that other methods of recovery can be used.

However, that same relationship will complicate those attempts at recovery, and this is something about which employers need to be aware.

It’s not just overpayment of wages that can lead to recovery procedures. An employee might have been given an advance of wages or they have incurred training costs which the employer wants to recoup.

How this can be handled depends on the employment contract, the size of the overpayment and the current employment status of the person in question.

What does the law say?

Under Section 13 of the Employment Rights Act 1996, employers can’t make deductions from wages unless:

  • they are permitted to do so by law or the law requires them to do so;

  • there is a clause in the employment contract that allows them to do so;

  • the employee/worker has given them prior consent to do so.

When can deductions be made?

There are several occasions on which an employer may wish to make deductions from an employee’s wages. These include:

  • Contributions towards any pension scheme.

  • Any uniform issued by the company.

  • Any damage or fines in relation to company vehicles.

  • Any company property not returned on the termination of employment.

  • The cost of any unauthorised expenditure.

  • In the event that an employee leaves employment after completing training for which the business has paid.

  • Annual leave taken but not accrued.

If the employee/worker is still employed by the company, an overpayment can best be handled by a deduction from wages. However, without a provision in the employment contract or express permission from the employee/worker, an attempt to make a deduction from wages will be counted as a breach of contract. The employee/worker will be able to bring a claim in respect of that breach.

Under Section 14, deductions are permitted if wages have been overpaid or if the company had overpaid expenses that have been incurred by the employer/worker in the course of their employment duties.

Employers should bear in mind that this exemption only applies to genuine overpayments.

They should not try to make use of it in order to justify recovering other overpayments. An employer’s implied duty of trust and confidence under the employment contract means that they should avoid making deductions without giving prior notice. A large lump sum deduction that leaves the employee/worker in financial difficulty should be avoided if at all possible.

If there is no provision in the contract of employment for recovery of an overpayment, or if the employee has left the company, an employer can try to recover the overpayment in the civil courts by using the common law remedy of restitution based on a mistake of law or fact.

The Minimum Wage

Some deductions may take an employer’s wages below the level of the National Minimum Wage (from 2016, the National Living Wage).

Most deductions from wages do not reduce National Living Wage pay as long as those amounts are not required expenditure in connection with the worker’s employment or for the employer’s own use or benefit – for example, pension contributions or a subscription to a trade union.

However, if the deductions are for goods or services which are for the use of the business or for its benefit (for example, equipment the employer is providing to the worker in order to allow them to carry out their duties), they can’t be counted towards National Minimum Wage pay and can’t be made if they will take the worker’s pay below the Minimum Wage level.

What should employers do?

Employers should carry out a review of employment contracts to make sure that there are provisions included for recovering overpayments, training costs and other monies. If there is no provision in an existing contract, employers should seek legal advice in order to ensure that they have the best chance possible to recover outstanding money.

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