The general rule is that an employer is legally entitled to recover any overpayment of salary or expenses from an employee, regardless of whether the employee is aware of the overpayment or has already spent the money.
Where an employer has made an overpayment of salary or expenses, the employer has (broadly speaking) two options for recovery:
- deduct the amount of the overpayment from future wages or expenses, where the employee is still employed; or
- bring a civil claim for recovery of the overpayment, based on the law of “unjust enrichment” or under a clause in the contract of employment which gives an express right of recovery, if such clause exists.
As soon as the employer becomes aware of the error, the employer should contact the employee. Equally, an employee should talk to their employer should they notice the overpayment in their payslip.
It is good practice for the employer to first consult with the employee before making any deductions in respect of an overpayment (whether there is the contractual ability to recover or not) and, where possible, reach an agreement as to how repayment will be made in an effort to avoid any potential ill-feeling between the parties or potential hardship if the employee has spent the funds!
Where an employer fails to act reasonably, this could be construed as a fundamental breach of the implied term of mutual trust and confidence. Ultimately, an employee may feel forced to resign and bring a claim for constructive dismissal.
Can an employer still recover an overpayment if the employee has left?
The employer’s right to recover overpaid salary or expenses remains “live” even though the employment relationship itself may have ended – subject to an overall time bar, please see below. It can, however, be more complicated (though not impossible) and, often, more costly to recover the overpayment once the employee is no longer employed since there is no longer any possibility to deduct from the employee’s wage.
In such circumstances, the employer will need to contact the former employee and request repayment of the overpayment. This should be done informally at first, albeit in writing. If the employee refuses to repay the sums owed, it is open to the employer to take legal action against the former employee (this involves issuing a civil claim for recovery of the overpayment as a debt).
How long does an employer have to recover the overpayment?
Where there is an express contractual right of recovery, an employer has six years from the date of the overpayment in which to bring a claim and a comparable period where the claim is made on an alternative basis eg unjust enrichment. Nevertheless, the prospects of recovering an overpayment are greatest if the claim is made promptly and, ideally, the parties come to an agreement out of court since legal costs may be disproportionate to the value involved. It is therefore advisable that the employer acts quickly when discovering any overpayments and tries a pragmatic approach first!
Tips for employers
- Notify the employee of the overpayment and provide them with an explanation as to how this has arisen, together with a breakdown (including dates and amounts). This will make clear to the employee the reason for the overpayment and exactly how much will need to be repaid.
- Check the employee’s contract of employment to see whether there is an express provision relating to recovery of an overpayment and how this should be handled. This may confirm that the employer has the ability to deduct the full amount of the overpayment at once or it may provide for repayment in instalments (consider potential financial hardship on the employee if the full amount is recovered at once, however).
- In the absence of any express provision to recover overpayments, consult with the employee with a view to negotiating a repayment plan – this does not necessarily mean deducting the amount(s) from the employee’s wages, but could include the employee working extra shifts or staying later to make up the additional time (or a combination of repayment/overtime).
- Act fairly and reasonably throughout the process, particularly as the employee may not even be aware of the overpayment and/or could be anxious about any reclaim request.
We have set out below a template letter notifying an employee of an overpayment. Whilst a helpful guide, we advise caution when using templates as each case may be different; legal advice should be obtained if you are unsure.
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Template letter notifying employee of overpayment
[Name]
[Address]
[Date]
Dear [Employee],
Re: Overpayment of salary or expenses
I understand that you have been overpaid by the sum of £[●] for the last [●] weeks/months as a result of [a mistake in our payroll administration]. This gives rise to a total overpayment of £[●].
The Company would like to recover the amount overpaid but does not wish to cause you any financial hardship. Consequently, it is proposed that we make deductions from your salary for the next [●] months in order to recover this amount. For clarity, this would be at the rate of £[●] per [pay period].
Please sign and date the attached authority and return it to [●] in Human Resources as soon as possible.
I apologise for any inconvenience that this may cause you.
Yours sincerely
[Name]
[Position]
Authority:
To [Employer]
I authorise you to make deductions from my salary for the next [●] months at the rate of £[●] per [week] [month] in order to repay the amount of the overpayment, which is £[●] in total.
Signed ………………………….. Dated …………………………..
[Employee]
