Wage deductions

I have overpaid an employee, when can I make a deduction?

Overpaid your employee, what can you do?

If your employee has more money in their wages than they are expecting, they should contact you as soon as they realise. Once you the employer realise that an error has been made, you should notify your employee, in general, you are entitled to take it back from your employees next wages.

An employee should contact your payroll office and ask them to confirm whether or not the pay is correct. If you confirm that the payment is correct, you are unlikely to be able to recover the money if you later discover that it is not correct.

Your legal position

What is your legal position on discovering that you have overpaid an employee? The “protection of wages” rules in the Employment Rights Act 1996 provide clear rules about making deductions from wages. In general, deductions may only be made from wages if the law permits it, or if your contract of employment specifically permits it, or if you and your employer have made a written agreement that permits it. See the FAQ Can I deduct money from my employees wages?

However, the important point to understand is that the protection offered by the Act does not extend to an overpayment of wages or expenses. An overpayment is specifically excluded from protection. This means that, if you recover the overpayment from later wages, they cannot complain to an employment tribunal that you, the employer, has made an unlawful deduction.

They could, however, sue in a civil court, e.g. the small claims court. That would depend, of course, on whether they thought it was unfair and unreasonable for you to recover the overpayment. And that is the issue that you have to consider before recovering an overpayment by deducting it from your employees wages – is it reasonable in all the circumstances to make the recovery?

What factors would a civil court take into consideration if you were sued by your employee for an amount of money deducted from their wages?

  • In the employer’s favour is the principle of “unjust enrichment” – a general view taken by courts that a person should not benefit from another’s mistake.
  • In the employee’s favour is the principle of “change of position” – that the employee’s circumstances do not make it reasonable for the money to be recovered, for example, because they were told on querying the payment that it was correct, or they spent or committed the money in the valid belief that they were entitled to it.

But don’t think that, just because they have spent the money, that makes it unreasonable for you, the employer, to recover it.

If they are still in the employment where the overpayment occurred

On discovering an overpayment, a good employer should immediately contact the employee, explain the problem and tell them that the money will be deducted from their next wages. But you should check that, by doing so, it will not put your employee in financial difficulties. If a full recovery would cause you problems, you may suggest recovering the overpayment in instalments, or taking the full amount of the overpayment and giving you a short-term loan that you would then pay off in instalments.

However, if your employee still feels that it is entirely unreasonable for the recovery to be made from their wages, you should make use of your employer’s grievance procedure. They should raise the grievance before the recovery is made, the employer should wait until the grievance is resolved. If you go ahead with the recovery, it may be possible for them to take you to court, but not before following each stage of the grievance procedure precisely, including the appeal procedure if necessary. See FAQ Can an employer deduct money from an employees wages?

Your employee may obtain advice on suing you in court, you should discuss the situation with a solicitor. We have a number of Solicitors that we have worked with that we are happy to recommend to you.

You are entitled to recover the money without the employees permission, but must do it in a fair and reasonable manner. If they were not entitled to the extra money in the first place, you should work together to correct the situation.

If your employee has left the employment where the overpayment occurred

In this situation, you are unable to make a deduction from their wages. You may contact the ex-employee claiming that they owe money that was overpaid in the former employment? Much will depend on what was stated in the employment contract. Some contracts state that, if an employee leaves the employment owing the employer money that could not be recovered from final wages, the amount owed becomes a civil debt. If there is no contractual provision to treat the alleged overpayment as a civil debt, you will have considerable difficulty in enforcing the recovery if they refuse to cooperate. In either situation, you should obtain advice from a solicitor.