Where an employee has received an overpayment of wages, expenses or other payments, the employer can recover these payments made in error by making deductions from his/her wages.
What are wages?
The term “wages” is widely defined and includes any sum payable for work carried out/services provided in connection with their employment. It includes;
- Any fee, bonus, commission
- Holiday pay, sick pay and statutory family pay (in its various guises)
- Other statutory payments made in lieu of wages
Wages does not include any loans, payment of expenses, pension contributions or payments/compensation for loss of office. Benefits are also excluded unless they are money or can be exchanged for money, goods, or services.
What is an overpayment?
An overpayment is a payment made to an employee which they are not entitled to receive. An overpayment can be made due to a clerical or administrative error, payroll error or fraud on the part of the employee. It does not include loan or bonus subject to a clawback or where there is an error in the contract itself, and the payment has been made in accordance with that contract.
Recovery of an overpayment?
Firstly, check the contract itself. The contract may contain a specific clause allowing you to recover that overpayment from the employees’ wages whilst still they are employed.
If the contract is silent, the employer should consult the employee as soon as the error is discovered and obtain the employees written authority to recover the erroneous payment. Speed of action is vital in these circumstances.
Unless the above situations apply, it is generally unlawful to make any deductions from an employees’ wages. The Employment Rights Act 1996, outlaws any such deductions. However, as long as the deduction is intended to recover any overpayments, then such deductions from wages will not be unlawful. However, note should be taken that this does not apply where the overpayment occurred due to an error in the contract, and the payment was made in reliance upon it. When such deductions are made, they must be made from wages (not from expenses), and they must be made to seek reimbursement only.
Deductions cannot be made from statutory redundancy payments unless it is part of a settlement agreement and there is provision to cover this. Where enhanced payments are made, it may be possible to deduct under the “enhanced” element of the payment.
Statutory payments such as Statutory Maternity Pay and other family payments fall within wages, hence corrections can be made to recover the overpayment from future payments. To this end, the parties should reach an agreement for the deductions to be agreed – note that you cannot contract out of SMP etc entirely.
Commission or bonus payments that are subject to clawback, can be recovered as they would not be classed as an overpayment. But if the clawback clauses do not exist, it would have to be recovered by agreement.
It should be noted that where an employee has inquired about an overpayment and the employer has confirmed their entitlement to that pay, the employee can rely on the common law principle of “Estoppel” – where the employee has relied upon the overpayment and the employers’ confirmation, the employer can be prevented or “estopped” from recovering the money.
It is worth noting that such deductions are ignored when calculating wages for purposes of National Minimum Wages
Finally, where legitimate deductions are made, an employer should make sure that all necessary tax, national insurance, and payroll adjustments are made to ensure that the employee does not suffer additional but unnecessary losses.
It is important that you seek expert advice and that your HR documents contain appropriate clauses to allow you to make such recovery. Quest have the necessary expertise both to offer the initial advice and guidance but also to review and draft your HR documents.
The article is for general information purposes only and should you require any further assistance on the matter please do not hesitate to call our advice-line team on 01455 852028.
