An Employer’s Guide to Payroll Errors and Overpayments
Every penny counts at the best of times but at the moment the cost of payroll errors would appear to be costlier than ever.
Whilst most of us are honest enough to notify our employers of an overpayment, this is not always the case and as usual there seems to be a lot of myths and false information out there.
We know that mistakes happen and can never be eliminated 100%, so in this article we look at the steps an employer can take to address the issue of a salary overpayment without falling foul of employment legislation.
Can I deduct for overpayments of salary?
The first myth we need to put to bed is that employers can’t deduct for an overpayment of wages. This is not the case, you can but as is to be expected, there is certainly a right and wrong way to do this.
It is pay day today and I have noticed that an overpayment has been made in error. What can I do?
You’ve noticed straight away so all you need to do is inform the employee/s and let them know the money will be deducted from their next salary/wages payment. You are legally able to do this but time is of the essence, so act quickly.
Do I have to agree this in writing?
Not necessarily but its good practice to follow up with a letter in any case.
Can the employee refuse because it’s not their mistake?
Put simply, no. ‘Finders keepers, losers weepers’ is not going to wash.
What if the overpayment was some time ago?
There isn’t a cut off point at which an employer can’t take steps to recoup overpayments but to simply deduct the money could leave you exposed to a risk of an unlawful deduction of wages.
How could it be an unlawful deduction? It’s not their money, its mine!
Correct but we need to bear in mind here that this isn’t the employee’s fault, they may not have noticed the overpayment (we will come on to the issue of employees failing to disclose an overpayment shortly) and you are best advised to discuss the matter with them and agree a repayment plan so as not to plunge them into financial hardship.
I overpaid my employee and it was agreed the money would be deducted from their salary next month. However, the employee was taken ill a short time after and has not earned their usual salary due to being paid statutory sick pay (SSP) in the month that followed. They are now saying that the deduction for the overpayment is a minimum wage breach. Are they correct?
No. The key thing to remember here is the money you are deducting was not theirs in the first place. You can still make deductions from salary for an overpayment if wages even if this may lower someone’s wages below the national minimum wage.
In this situation though, it is advisable to try and work something out to minimise any financial hardship as much as possible by perhaps making the deduction in instalments rather than in one go.
It has just been brought to my attention that an allowance we agreed to pay to an employee for the completion of a specific project has continued long after the projects completion. Where do we stand in terms of making deductions?
This type of situation is a little more complex, as it will all depend on what was agreed at the time and how it was agreed at the time. Remember- verbal agreements are not worth the paper they are not written on!)
Where a series of overpayments have been made over a long period of time the employee may be able to argue that they reasonably believed this was a payment they were legitimately entitled to receive.
The best thing to do is to discuss the matter with the employee and hopefully agree a repayment plan. However, if the employee genuinely believes that this is a contractual payment to which they were (and still are) entitled it will all depend on what was agreed at the time.
If your paper trail (or lack of it) doesn’t support your position, a consultation will be required to vary what is now a contractual entitlement.
Of course, there is always the option of taking legal action to recover the monies. However taking legal action against a current employee is not the healthiest of situations to be in, so you may need to be prepared to write off what has been overpaid to date and focus on getting the contractual payments correct going forward.
There are a lot of margins for error in this example, so seeking advice is essential.
Can I take disciplinary action against an employee who fails to disclose that they have been overpaid?
Possibly yes. This all comes down to the individual circumstances and the nature of the overpayment.
Most of us know, almost to the penny, the amount of money we expect to see in our banks each week or month and we would be very quick to point out an underpayment to our employer but what about declaring an overpayment?
If you are taking formal action against someone for failing to declare an overpayment, then you are dealing with a situation where it would be obvious that an employee has been overpaid. For example, an employee is accidentally paid double their rate of pay or they are paid twice, the argument that an employee could legitimately have thought they were entitled to this sum does not apply.
Instead they have a duty to bring the overpayment to their employers’ attention immediately; to simply keep quiet and hope no-one will notice is not acceptable. You may even be dealing with a case of potential gross misconduct, even though the overpayment was not the fault of the employee.
However, a one-off overpayment of a sum of money which is small (relative to the employee’s salary) may legitimately go unnoticed. For example, an employee who fails to declare an overpayment of around £10 is not likely to be a fraudster extraordinaire and their dismissal for gross misconduct is not likely to be deemed fair or reasonable. That doesn’t mean you can’t make arrangements for the overpayment to be deducted though.
When it comes to salary overpayments and deductions, these situations are often complex and as such it is not possible to offer a ‘one size fits all’ solution. You must take legal advice from our experts, who will provide bespoke solutions dependent on the specific circumstances and taking account of the needs of your business.
And finally……whilst not a salary overpayment, a charity shop in Manchester felt first-hand the true cost of an overpayment, or in this case a refund to customer which should have amounted to £9 but instead they transferred over £90k!
Sadly, the customer did not believe that honesty was the best policy and consequently she has received a suspended prison sentence with the charity in question still out of pocket to the tune of over £30k!