Generally speaking, when an employer overpays an employee (for example, by mistake) the employer will be left to use the common law of restitution to try and recover the monies. The case law in this area is somewhat challenging, as if the employees change their position (for example by spending the money) or there has been a delay in discovering the mistake, the less likely the employer will be to recover the money. In this position the employer is stopped from recovering payment. An employer attempting to make the deduction from the employee’s wages could find themselves facing a claim of unlawful deductions from wages.
For this reason, an employer should enter into a written agreement with the employee in advance of making a deduction. Often this is in the contract of employment but it can be a separate document that should specify the kinds of deductions that might be made from somebody’s wages and the circumstances in which it might happen. This could extend not only to overpayments, but to damage to company vehicles or other company property such as mobile telephones, car parking fines that the company incurs as a result of the employee’s conduct, stock deficiencies or cash shortages in the case of retail workers and training fees where the employee leaves shortly after the employer has paid for them to undergo training. It is only if the employee has given their prior consent to these sorts of deductions being made that it will be lawful for the employer to make a deduction.
If the employee has run out of sick pay and is perhaps in receipt of Statutory Sick Pay (SSP) only, it would be unlawful to make deductions from that SSP, for example in relation to parking fines. This is because SSP is meant to maintain a certain threshold level of protection. In circumstances where somebody was off sick, the employer might have to wait for them to return to work and start earning again before a deduction could be made or for them to leave, when they might be able to deduct it from untaken holiday.
There has recently been a case involving the situation where an employee does not work out their notice. The particular clause was worded as follows:-
“If an employee leaves, without working the apparent notice, the company will deduct a sum equal in value to the salary payable for the shortfall in the period of notice.”
In the case of Li v First Marine Solutions, the particular employee was a skilled engineer where the employer was going to have to pay to replace her. The Court of Appeal was asked to consider whether or not such a clause in the contract was an unlawful penalty clause or whether it actually was a genuine pre-estimate of loss which the employer was entitled to make. The Court ruled in favour of the employer, showing that in the case of skilled staff it is worth having such a provision, not least as a deterrent.
It is worth reviewing what provisions you have got in place in respect of making deductions from time to time, to ensure they provide you with the protection that you need.