What to do when you’ve overpaid an employee
Overpaid Employee: While the implementation of robust payroll processes and the use of advanced payroll software can limit the opportunity for error, mistakes in salary calculation remain possible, and can lead to the overpayment of an employee.
From the employer’s perspective, the Employment Rights Act 1996 (section 14) permits the reclamation of this money through deductions from future wage payments, where “the purpose of the deduction is the reimbursement of the employer in respect of (a) an overpayment of wages; or (b) an overpayment in respect of expenses incurred by the worker in carrying out his employment, made (for any reason) by the employer to the worker”.
However, any automatic deduction must be fair and reasonable, and must not excessively disadvantage the overpaid employee. For a simple, low value, one-off overpayment, an automatic deduction would normally be considered fair and reasonable. In these cases, the recommended course of action for the employer would be to:
- Check your payroll calculations again to ensure that an error has been made
- Notify the overpaid employee of the error
- Explain how the error occurred, provide evidence of the error, and detail the steps you intend to take to rectify the issue
- Enquire as to whether this is likely to cause the overpaid employee any kind of financial difficulty
- Either make the deduction in the next pay run or arrange an instalment plan to manage repayments.
It is possible that the overpaid employee may assume that it is their right to keep the overpayment, so it is important to approach the issue with tact and diplomacy to avoid dispute. If the overpaid employee is particularly unhappy at the prospect of repaying the overpayment, they may decide to raise a grievance, at which point the company’s grievance procedure will take effect. The employer should not attempt to reclaim the money while the grievance process remains ongoing. However, the advice provided to employees by ACAS is that the employer has the right to claim back salary overpayments if they are flexible and fair in their consideration of the overpaid employee’s position, and are happy to consider a repayment plan.
Managing Complex Over Payments
There are occasions when the circumstances surrounding the overpayment are more complex than a one-off discrepancy for a relatively small amount. In these cases, the employer must tread carefully to ensure that they can recover the funds in full whilst treating the overpaid employee fairly and reasonably.
An example of this would be where the employee has been overpaid regularly over an extended period of time, leading to a significant amount to be repaid. It would not be reasonable to simply deduct this amount from the employee’s next salary payment(s), as to do so could potentially leave them without enough money to pay their mortgage, rent or bills. Furthermore, the overpaid employee may have adjusted their lifestyle to reflect the higher income, increasing their outgoings to the extent that any overpayment recovery could prove very damaging.
In cases such as these, it is best to speak directly with the overpaid employee, explaining the circumstances of the error, and negotiating an extended payment plan to minimise the monthly impact on their finances. Depending on the company’s circumstances, it may be worth considering writing off a proportion of the overpayment to demonstrate to the overpaid employee that you are being reasonable in your approach, and to avoid any potential dispute.
Should the employee feel that the overpayments were valid, can demonstrate that they had been given reason to believe this, and have become reliant on the additional payments, the company may not have a fair or reasonable basis on which to justify overpayment recovery, in which case they may be forced to write off the owed amount.
Another example of a complex overpayment would be where the company does not become aware of the issue until after the six-year contractual claim period has expired. In these cases, it is often best for the employer to write off the owed amount rather than pursue salary overpayments through the courts, as the cost of doing so is likely to dwarf the amount reclaimed.
The issue of reclaiming overpaid wages is complicated further when the overpaid employee concerned has left the company’s employment. In this situation, the employer cannot simply deduct the overpayment from a future salary payment; nor can they meet with the ex-employee during the course of their workday to negotiate settlement. You may not be able to contact the ex-employee, or they may simply refuse to pay. In cases such as these, it is important to weigh up the value of the overpayment against the cost of pursuing the ex-employee through the courts to recover the money. While the company has the right to treat the overpayment as a civil debt, incontrovertible evidence will need to be provided to the court, and the time, energy and cost associated with this process is likely to be counter-productive.
How can salary overpayments be avoided?
While payroll errors can occur in any situation, the better the payroll software used, and the more robust the payroll processes, the greater the likelihood that salary overpayments can be avoided. For an inhouse payroll department, a high degree of accuracy may prove difficult to achieve due to a lack of resources and regular training, and the use of basic payroll software. As a result, payroll bureaus or external UK payroll service providers may represent a better option to reduce the risk of inaccurate payments.
Outsourcing payroll to an external UK payroll service provider often proves more cost-effective and efficient than recruiting and managing an internal team, as it gives the company access to fully trained payroll experts, who in turn can offer the company greater assurances that their compliance and legislative responsibilities are being met. A payroll bureau or external UK payroll service provider is also more likely to invest in the latest industry-leading systems, with inbuilt fail-safes which alert the user to potential errors and discrepancies before payroll is finalised, providing an opportunity to reverse the error before the employee is paid.
It is because of these systems, training, and expert attention that the use of an external UK payroll service is typically a better option for many companies than recruiting and managing an internal team. This is demonstrated by an annual survey by the Chartered Institute of Payroll Professionals (CIPP), which found that the number of companies partially outsourcing payroll had increased from 10% to 35% between 2008 and 2019.
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