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FAQ: The Legalities of Salary Overpayments

Author: Garry Crystal - Updated: 28 September 2012 | commentsComment
Deductions Salary Overpayment Employer

Employers are legally entitled to recover salary overpayments. Employers are not actually required to inform employees that these deductions will take place although an agreement should be reached over deductions.

Why Would Salary Overpayments Occur?

It’s quite easy for a mistake to be made over the amount of salary an employee is paid, especially with new employees. The wrong salary figure could have been entered by the payroll department or given to payroll from a manager. In some cases the overpayment may be so small that it could go unnoticed by the employee for months. Employees will usually notice if they have been underpaid but many will never bother querying overpayments, especially small ones. But the overpayment may not even come to the employee’s attention until the employer gives notification of overpayment.

Should Employees Inform Employers if Overpayment Occurs?

If an employee does notice that an overpayment has occurred they should inform employers immediately. These overpayments will simply build up over time. When the employer does notice the overpayments they can actually deduct it from the employee’s next salary. Employees should contact the payroll department to query the overpayments. An employee who allows the payments to build up could be accused of dishonesty by the employer.

Can the Employer Deduct the Overpayments from One Salary?

By rights an employer can deduct all of the overpaid salary from the employee’s next salary payment. This can of course cause difficulties for the employee. But there is no actual employment protection rule that safeguards against this happening. Salary deductions for overpayments are exempt from the Employment Rights Act 1996, which sets out the employee’s rights on wages protection. An employer is legally entitled to recover the overpayment from a single salary.

Should an Employer Inform the Employee of Deductions?

Employers should inform employees of the overpayment situation and the deductions that are going to occur. A good employer will consult with the employee and set up a deduction arrangement that will not cause the employee financial hardship. Employees who did not notice the overpayment may think that because the money has been spent they should not have to pay it back. But complaining about the deduction may not be a good idea if an amicable agreement is to be reached over deductions.

What Are the Alternatives to a Single Salary Deduction?

An employer and an employee should come to an amicable agreement over the frequency and amount of deductions. The employer should ask the employee if a single salary deduction would cause financial hardship. An agreement should be reached on deductions that an employee can comfortably afford such as a period of deductions by instalments. The employer could suggest a short term loan that will help while the overpayments are being deducted.

Can I Complain to Anyone About the Deductions?

Salary deductions for overpayment are exempt from the Employment Rights Act. This means employees who have had deductions made for overpayments cannot take the matter to an employment tribunal. It is possible for employees to sue the employer through the civil courts. An employee would have to prove in court that it was unfair and unreasonable of the employer to deduct the overpayments. Taking the matter to the civil courts is a serious matter, especially if the employee is still employed at the company they are suing.

What Would the Court Consider to be Unfair and Unreasonable?

There are a few reasons why the deductions could be seen as unfair and unreasonable. If the employee had queried the overpayments issue with the payroll department and was then informed that the payments were correct. The employee could then assume they were entitled to spend the money without any recourse. It may also be the case that the employee spent the money after believing they were genuinely entitled to it. If these reasons were applicable then a court may favour on the side of the employee.

What Reason Would a Court Side with an Employer?

A court could favour the employer if it looks as if the employee is trying to benefit from a genuine mistake made by an employer. The ‘unjust enrichment’ principle is a view often taken by the courts. Even if the employee has spent the money under a genuine assumption that their salary figure was correct the court could still side with the employer.

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