What counts as an overpayment?
An overpayment happens when an employee receives a payment or part of a payment they are not entitled to as part of their remuneration for work. This could be most likely due to a payroll error or administrative issues.
Even the smallest amount of unauthorised excess in payment will count as an overpayment. So, although an employee might think there is no harm in not raising a small overpayment issue to their employer, they should do so as quickly as possible to avoid disciplinary or legal action against them. Additionally, small overpayments over time can lead to larger debt.
Can an employer reclaim overpaid wages?
If the employer has overpaid an employee by mistake, then the employer has the right to reclaim that money.
Employees and workers are generally protected from any unlawful deductions from their wages under the Employment Rights Act 1996. However, there is an exception which allows employers to make a deduction to correct an error in relation to overpayment of wages. Furthermore, it’s common for an express provision to be included in employment contracts to allow corrections to be made in case of payroll errors.
For more information, read Deducting employees’ wages.
How can an overpayment be recovered?
Deductions from wages to correct an overpayment can be made in one lump sum or in a series of instalments. In either situation, the employer should provide notice to the affected employee and seek agreement in advance of any deductions.
Where the overpayment is significant, spreading the recovery over a period of time will help to avoid disputes. Employers should take into account how dealing with repayment would be fair in the employee’s circumstances. Any recovery agreement made should ideally be made in writing and signed by both parties. Agreed adjustments can then be made in payroll.
What should be considered when recovering an overpayment?
When handling recovery of an overpayment of wages from an employee, employers should consider:
Continuous overpayments
Where there have been multiple mistakes over a long period of time (eg months or years), the overpayment may have been substantial. In this case, a lump sum payment may not be suitable. The employer should agree on a schedule of repayments or deductions with the employee to ensure that there is minimal disruption to their financial affairs.
Provisions in the employment contract
There may be a clause in the employee’s Employment contract allowing deductions from wages in cases of overpayment. Such clauses are permitted under the exceptions to the Employment Rights Act 1996’s general prohibition on deducting employee wages.
If such a clause applies, it should allow the employer to automatically make a deduction, provided it’s fair to the employee, as this has been agreed upon within a legal document signed by both parties.
However, relying on this exception without providing notice to the employee and seeking agreement can potentially lead to a breach of the implied term of trust and confidence and a potential constructive dismissal claim. So, it would still be good practice for the employee to be notified when an employer chooses to take this course of action.
What if the employee has left the company?
An employer has the right to reclaim overpaid wages even if an employee has left their employment with the business. However, if the employee has already left, it can be more difficult for employers to recover any overpayments. Action should be taken quickly in case the final salary payment has not yet been made.
If the final payment has been made, an informal request seeking repayment can be made to the former employee. If they refuse to make voluntary repayment, the employer should consider other options. These may include:
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gathering together all available information about the former employee’s current means and employment status, to determine whether repayment is likely (ie whether the former employee can actually repay any of the overpaid wages)
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making proposals for repayment over a period of time, with mutual agreement from the former employee
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sending the former employee a Letter before action notifying them that you may start court proceedings against them if they refuse to pay
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making a court claim against the former employee as a civil debt or money claim to recover the overpaid money
Where an employer chooses to make a court claim, they should consider whether the legal fees may cost more than the sum in question. If you do decide to take legal action or need advice on your legal position in relation to the debt, you can use our dispute resolution service.
Can an employee defend a claim for overpayment of wages?
Where the overpayment is only discovered after a significant period of time, the overpaid employee may have already spent the money and may attempt to defend the claim for repayment.
In this situation, the employee could use a common law defence known as ‘estoppel’ to defeat a claim for repayment. For this defence to be successful, the employee will need to prove that either:
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they were led to honestly believe that they were entitled to the money by their employer’s words or conduct, or
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they were honestly unaware of the overpayment
The employee must have relied on this belief or understanding when spending the money, and this must have ‘changed their position’. This usually means that the employee has spent it or used it to repay outstanding debts. Provided it wasn't the employee’s fault that they were overpaid, they have a chance of successfully defending a claim.
In practical terms, it may be more advisable for the employer to discuss this with the former employee first and try to agree on a programme of repayment over a period of time rather than attempt to claim for repayment.
In some cases, it might be practical for the employer to consider writing off part or all of the overpayment rather than become involved in legal proceedings to recover the full amount. However, each case should be considered on its individual facts.
