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Recovering an Overpayment

If you ever find yourself in a situation where you have overpaid an employee, recovering that overpayment can be like navigating a minefield.

You need to be aware of the process to follow when seeking to recover the overpayment from the employee or employees. You cannot necessarily rely on a statement in your employment agreement that the employee has agreed to you recovering money from their pay.

The reason you cannot rely on such a statement is that the employee can withdraw their agreement at any time. All they need to do is write to you withdrawing their consent and that effectively ends any contractual right you may have to make a deduction.

In certain circumstances you can rely on the Wages Protection Act 1983 to recover money, but you must do so within limited timeframes.

For other situations, you cannot rely on the Act. In 2016 a requirement was introduced that made it an obligation for employers to consult with their employees before they deducted any money from their wages. Also any deduction must be reasonable and not leave the employee with insufficient money to live on.

One recommendation that McKone Consultancy offers to clients is to include, in your employment agreement, a requirement that an employee must not unreasonably withhold their consent to a repayment when this is notified to them. While this is not a foolproof solution, it gives you the ability to enforce the contract and require the employee to comply with their contractual obligation to be reasonable when responding to any request to recover an overpayment.

The best approach is to ensure you have processes in place to avoid an overpayment situation from arising in the first place. This will require you to have good checks and balances in place to ensure employees pays are correct before they are processed.

If you do make a genuine error that results in an overpayment, notify the employee as soon as it occurs, preferably before the employee spends the money. When you notify the employee, you should detail what occurred that resulted in the error. If you don't notify the employee as soon as you become aware of the error, this may hinder your ability to recover the money. If the employee is unaware of the error and relies on the money they have received, even though they were not entitled to it, you may have a struggle on your hands to recover the money.

The onus is on you, the employer, to show the overpayment was made in error, or under duress, or was obtained illegally or whatever the reason. You need to explain what happened and what you propose to do to recover the money from your employee(s). Your repayment proposal must be reasonable. Seeking a full repayment in such a way that leaves the employee with little or no pay would not be reasonable. Seeking repayment in installments that will see the money recovered over a period of time, at a level that still leaves the employee sufficient money to meet their personal obligations, would be reasonable.

Where the employee proposes to repay the money a little at a time, for example a dollar a pay, that too might be unreasonable, particularly if the overpayment is only a small amount.

When it comes to making any deduction from an employee's pay, the minimum obligation you have is to consult with the employee as to why the deduction is required, and the deduction must be reasonable and not significantly reduce the employee's pay. Ideally, by notifying the employee as soon as you become aware of the overpayment, you may be able to stop the employee making use of the money, thereby increasing the ability for the employee to repay the money quickly.

If you find yourself in this situation you should contact McKone Consultancy for advice on the best way to approach the recovery of the overpayment.

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