Overpayments can be reasonably common in businesses operating computerised payroll systems particularly in relation to bonuses or overtime. Whether the company is legally entitled to recover the overpayment is a question commonly raised.
Essentially in order to hold onto the repayment, the employee has to show three things. Firstly that the overpayment was the company’s fault and not the fault of the employee; secondly that the employee had reasonably assumed that they were not being overpaid and thirdly that as a consequence of the overpayment they have suffered financial disadvantage (generally meaning that the money has now been spent).
It would be unusual to be able to meet all three criteria, mainly because employees are rarely given increases in pay without having been told about it first, so the second test is particularly hard to meet.
It is essential that the company’s policy in relation to overpayments is stated in the contract and employee handbook, placing the onus on the employee to report overpayments to their manager immediately.
Generally speaking a fair way to deal with the situation is to discuss it with the employee and, wherever possible, agree a structure whereby the overpayment can be repaid, either from the next pay packet or in instalments over an agreed period of time where that would not be possible.