Let’s assume that you’ve overpaid somebody either as the result of an administrative error or because they have fraudulently claimed an entitlement to something that is not the case. Ideally you should have a contractual provision expressly allowing deduction from wages in the event of an overpayment. This is so you can rely on it to recover the overpayment where they are still employed by you. If you didn’t have this contractual provision, making the deduction would be a breach of contract.
In the absence of a contractual provision, the employer could rely on a common law remedy called ‘restitution’ based on a mistake of fact to recover the overpayment through the civil courts – this law prevents the unjust enrichment of the worker at your expense. You should act as quickly as possible once an overpayment is discovered because a worker can rely on a ‘change of position’ defence so, for example, if they’ve spent the money they would argue they are no longer able to repay it. An example case where this occurred was County Council of Avon v Howlett 1983 where a teacher was paid more sick pay than he was entitled to. At the time he queried the overpayments but he was told they were correct and by the time the Council had realised its mistake he had spent the money. The Court of Appeal prevented the Council from recovering any of the overpayment clearly taking into account the fact that the Council had confirmed that the payment was correct so the employee, in good faith and without any knowledge of the claim, changed his position (spent the money) so it was not his fault.
The easiest option is usually to recover an overpayment by making deductions from future payments of wages or salary over a period of time. In circumstances where the deduction is to recover an overpayment of wages or an overpayment of expenses, the unlawful deduction from wages regime in Sections 13-27 of the Employment Rights Act is dis-applied (Section 14(1)). Normally it is unlawful for an employer to make a deduction from a worker’s wages unless the deduction is authorised specifically by law or the employee’s contract or the worker has given their prior written consent to the deduction. An example of this applying is the case of SIP (Industrial Products) v Swinn 1994 where the employee had fraudulently obtained around £2,000 from his employer by altering fuel receipts which he then submitted as expenses claims when he was dismissed. The employer withheld the remainder of his wages and holiday pay. Normally this would clearly have been an unlawful deduction from wages, however the Employment Appeal Tribunal found that this fell within the overpayments exception.
It is worth knowing that you cannot make deductions from somebody’s statutory redundancy payment as that is a payment which is specifically excluded from the definition of ‘wages’ in Section 27(2)(d) of the Employment Rights Act 1996. Elsewhere in the redundancy sections the legislation provides that the employer shall pay a redundancy payment to any employee if they are entitled to it. The only way an employee could agree to a reduced statutory redundancy payment would be in a Settlement Agreement. However, if the employee was receiving an enhanced redundancy payment it may be possible for an employer to make a reduction from the enhanced element to recover an overpayment, but this again will depend on the terms of the employee’s contract.
Likewise, you are not able to make a deduction from statutory sick pay. If you have overpaid somebody and you later make a payment in lieu of notice (that is non-contractual) you can make the deduction for an overpayment. If the employee brought a claim in breach of contract for the difference you would be able to defend it on the basis that you were entitled to recover the overpayment from wages and, in the alternative, counter claim for a set-off of the overpayment.
Where you make any deductions it should be clearly stated on an itemised pay statement.
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