Clawing back overpayments

Generally, deductions from wages can only occur where the deductions are required or authorised by law; are contractually agreed to or where consent has been received from the employee for the deduction. If none of these situations exist, then any effort made to recover money will be classed as unlawful deduction of wages, for which an employee can bring a tribunal claim.

Deductions for overpayments are slightly different in that the law provides an exemption for overpayments and will allow employers to reclaim the overpaid money in these circumstances. This means that employers are able to correct overpayments though the payroll. Even so, including a deduction from wages clause due to mistaken overpayments in all employees’ contracts will put employers in a better position when trying to undertake these, especially because, generally, the clause would have been signed and agreed to by the employer.

Though the exemption for overpayments does allow outright deductions employers should exercise fairness and reasonableness in doing so. The easiest way to prove the deduction was fair is to involve the employee in the process. Best practice would be to contact the employee, explain the issue and inform them that the money will be deducted from their next pay packet. Prudent employers should also be checking with their employees that by reclaiming the overpayment they are not causing the employee to be placed in financial difficulty. If the overpayment was a significant amount of money, then it may be best for you to both agree a series of smaller payments over the next few pay packets, rather than taking the whole amount from one.

Overpayments should be dealt with as soon as they arise; leaving the situation so that incorrect amounts are paid over a longer period could result in difficulties when attempting to reclaim because the employee could claim a defence to the overpayment. This will require them to prove that they have acted in good faith to change their position, i.e. spent the money, that the employee believed they were entitled to treat the money as their own and that the overpayment was the fault of the business. Though this is, generally, difficult to prove, because employees can claim a defence to stopping the recovery of the money, employers should act swiftly and fairly within these circumstances.

For further clarification please contact the Peninsula Advice Service on 0844 892 2772.