What options are available to an employer where an employee has been overpaid?
An employee can be overpaid for a number of reasons, whether it be the result of a fraudulent expense claim, a change to their salary or reduction in hours which is not processed in good time before payday, or an administrative error.
Should an employer discover that an employee has been overpaid, there are several options available to them to recover these monies.
1. Recovery by deduction of future wages
Usually there will be a clause in the employees contract which expressly relates to recovery of overpayments. In the normal course of events a deduction from wages can give rise to an unlawful deduction claim, but as provided in S14 Employment Rights Act 1996, this will not apply to a deduction made where the purpose of the deduction is reimbursement of the employer in respect of an overpayment of wages or an overpayment of expenses. This exception does not apply where the overpayment relates to anything other than wages or expenses.
2. Bring a civil claim for recovery
If the employee is no longer employed and deduction of future wages is not possible, and the employee has refused to voluntarily repay the overpayment, the most appropriate route for recovery, will be by way of claim in the county court, known as a civil claim.
If an employer is unable to recover an overpayment they will bring a claim in the civil courts under the law of unjust enrichment or breach of employment contract (clause permitting).
What is unjust enrichment?
Unjust enrichment, also known as the law of restitution, will in any claim establish the following three points:
- The defendant has been enriched or received a benefit
- The enrichment of the defendant is unjust
- The enrichment of the defendant was at the expense of the claimant
Is there any defence available to the employee?
The primary defence available to a claim is change of position. This defence is available where it can be demonstrated to the court that the employee acted in good faith, and that their position changed for the worse (in other words they have spent the overpayment their employer is seeking to recover).
A change of position means that an employee does not have to repay all or part of an overpayment if it would be unjust to do so.
The employee will not be able to rely on this defence if they have acted in bad faith, which means that they were aware of the overpayment and that it was not a genuine payment they were expecting or should have received.
Points for employers to note if considering civil claim for recovery of an overpayment of wages:
- In the interest of protecting the working relationship, an employer should seek recovery of the overpayment informally with the employee prior to commencing formal legal action.
- Be understanding of financial circumstances. If you have evidence of income and expenditure and refuse a reasonable offer of repayment, a successful judgment will mean little if the employee has no means or assets for you to attach to.
- If the employment relationship has ended, approach recovery without commencing litigation in the first instance. Any efforts made to recover the monies in the pre-litigation stage will demonstrate compliance with the pre-action protocol for debt claims.
What should employers be doing?
- Reviewing contracts of employment to ensure there is a provision for recovery of wages.
- Act as quickly as possible once an overpayment is discovered. The longer an employer delays between the overpayment, the discovery of the mistake, and taking action to recover the sum, the more likely an employee can rely on the change of position defence.
What should employees be doing?
- Check your wage slips are accurate each month including any hours worked, overtime and expense claims submitted.
- If you notice any discrepancies, raise this with your employer without delay.
- Do not bury your head in the sand if you notice an error, even if it goes on for some time your employer will still be able to recover from you if you know you should not be receiving the money yet continue to do so!