PAY - 24.08.2023

Recovering overpayments from an employee

You’ve discovered that an employee has been accidentally overpaid and are thinking about automatically deducting the amount of the overpayment from their next salary payment. What does the law permit you to do here?

Payroll error

No matter how careful you (or your agents) are, payroll errors occur. Where this happens you might decide that the simplest option is to deduct the overpayment on your next payroll run.

Unfortunately, whilst that might be the easiest solution, it isn’t necessarily a lawful approach. So, what does the law say about the recovery of overpayments made to employees?

The law

The Employment Rights Act 1996 (ERA) lays down clear rules about the deductions employers can lawfully make from their employees’ salary and wages payments. Generally, a deduction may only be made where:

it is permitted by law, e.g. tax and NI contributions or an attachment to earnings order
it is provided for in the employment contract or another agreement between the parties, such as a training costs agreement; or
the employee has specifically agreed in writing to the deduction in advance of it being made.

Workplace myth

Many employees believe that this means you’ve no right to recover an accidental overpayment unless their employment contract provides for this situation, or they’ve expressly agreed to it. Thankfully, this isn’t true as s.14 ERA excludes overpayments made due to “a mistake of fact”. An example here could be a calculation error.

Recovering the money

Furthermore, the ERA allows for accidental overpayments to be automatically recovered from future payments that are made to the employee, i.e. you do not need their express permission to make the deduction and don’t have to tell them in advance of you making it. That said, although the ERA is helpful for you here, you should inform the employee about both the error and your intentions in respect of recovery as soon as is reasonably practicable (see The next step ).

There is an exception to the above which is where an overpayment has been made due to a mistake in law. An example here would be that you have paid an employee for an absence when you weren’t legally obliged to do so.

An exception

Where there is an overpayment due to a mistake in law, you can only make a deduction from the next salary or wages payment if there’s an express provision for this in the employment contract or you have the employee’s express written permission (see The next step ). You can’t rely on verbal permission here.

Tip. In any situation, unless the overpayment that you’re seeking to recover is a minor amount, always allow the employee to reimburse you in instalments. They may not have realised there was an error and spent the extra cash.

For an overpayment of wages letter and a deductions from wages clause, visit https://www.tips-and-advice.co.uk , Download Zone, year 25, issue 15.

If the overpayment is due to a mistake of fact, such as a miscalculation, you can recover it automatically but should write to the employee first. Where it’s due to a mistake in law, e.g. you made a payment that the employee wasn’t entitled to receive, you’ll need their express written agreement if there’s no contractual right of recovery.