5 ways employers can handle overpayment of wages

Even the most expertly managed payroll systems can, on occasion, make mistakes. An employee might find themselves in receipt of more wages than they are due, a situation known as overpayment. This could be down to a system error, a miscommunication with the payroll department, or even a misunderstanding regarding an employee’s leave or sick pay.

While overpayment of wages might seem like a minor administrative hiccup, it can have wider implications for both the employer and the employee. We understand that navigating such situations requires a delicate balance of legal compliance, professional communication and empathy.

This blog post will outline five practical ways employers can effectively manage overpayment of wages. We’ll also consider the broader impact on employee wellbeing and explain how we can provide invaluable support.

What happens when an employee is overpaid?

When an overpayment of wages occurs, it essentially means the employee has received money they are not rightfully entitled to. From a legal standpoint, this forms a debt owed to the employer. The key challenge for employers lies in recovering this debt in a fair, compliant and employee-centric manner.

Discovering an overpayment can be unsettling for both parties. For the employer, it represents a financial discrepancy that needs to be rectified and potentially highlights a flaw in their internal processes. For the employee, it can be a shock, particularly if they were unaware of the error and have already spent the money. This is why a clear, transparent and sensitive approach is absolutely essential.

Five ways employers can handle overpayment of wages

While the law generally supports an employer’s right to recover overpayments, the manner in which this is done is crucial. Here are five effective strategies you can employ:

1. Prompt identification and communication

The first and most important step is to identify the overpayment of wages as quickly as possible. The longer an overpayment of wages goes unnoticed, the more difficult and potentially impactful it can be to recover. Once identified, immediate and transparent communication with the affected employee is key.

As soon as an overpayment of wages is flagged, the employer must verify the details thoroughly, gathering all relevant information, including the period of overpayment, the amount owed and the reason for the error.

They should also arrange a private meeting with the employee to discuss the overpayment, explaining the situation clearly and providing all available evidence while avoiding accusatory language, as it could have been an honest mistake on either side.

It is also important to be empathetic, acknowledging that this news might be unwelcome, particularly if the employee was unaware of the overpayment and may have already budgeted for or spent the additional funds. This empathy can significantly de-escalate potential tensions.

ACAS (Advisory, Conciliation and Arbitration Service) guidance strongly advocates for open communication, emphasising that employers should explain the situation clearly, give the employee an opportunity to respond, and provide a breakdown of how the overpayment occurred and the total amount to be recovered.

2. Propose a reasonable repayment plan (for current employees)

The Employment Rights Act 1996 specifically allows employers to recoup overpayments from future pay packets if the employee remains in employment, even if the overpayment of wages was the employer’s mistake.

While there is no legal limit on the amount that can be recovered in each pay period (and employers are even allowed to reduce the employee’s pay below the National Minimum Wage if necessary to recover the debt), a considered approach is always advisable.

From an employee relations perspective, recovering the overpayment in instalments over a few pay periods is highly recommended as best practice. This mitigates the financial shock for the employee and demonstrates a degree of flexibility and understanding on the employer’s part.

Employers should collaborate with the employee to agree on a repayment schedule that is manageable for them, considering their financial circumstances and existing commitments, as a mutually agreed-upon plan is far more likely to succeed than a unilaterally imposed one.

Once a repayment plan is agreed upon, it is crucial to make sure it is documented in writing and signed by both parties, providing clarity and protection by clearly stating the total amount to be recovered, the instalment amount and the duration of the repayment.

Employers who adopt an insensitive or aggressive approach to repayment risk the employee resigning and claiming constructive unfair dismissal, which could be argued on the basis that the employer’s handling of the repayment breached the implied term of mutual trust and confidence between employer and employee. Needless to say, this is best avoided.

3. Consider waiving the overpayment (in specific circumstances)

While an employer generally has the right to recover overpayments, there may be specific circumstances where waiving the overpayment, in part or in full, is a pragmatic and goodwill-building option.

For small amounts, if the administrative effort and potential negative impact on employee morale involved in recovery outweigh the financial benefit, deciding to write off the debt could be a wise business decision.

If the overpayment of wages was entirely due to an employer error and the employee can demonstrate genuine financial hardship as a result of the proposed repayment, an employer might consider waiving a portion of the debt or extending the repayment period significantly. This can foster significant goodwill and demonstrate a commitment to employee welfare.

Constantly pursuing small debts can negatively impact overall employee morale and create a perception of an overly rigid or uncaring employer, so it’s important to weigh the financial benefit against the potential damage to employee relations. Before waiving any significant overpayment, it is always advisable to seek legal counsel to understand any potential implications.

4. Handling overpayments for employees who have left

Recovering an overpayment of wages from an employee who has already left the business presents a different set of challenges, as there are no longer ongoing wages from which to deduct the sum. However, the overpayment still constitutes a debt owed to the employer.

Employers should write to the former employee promptly, explaining the overpayment in detail and providing clear evidence of the amount owed, including a breakdown of how the overpayment occurred.

They should then propose a scheme for the agreed repayment of the sum owed, which could involve a single payment or a series of instalments, similar to the approach for current employees, but with a different mechanism for payment, such as a bank transfer. If the former employee does not agree to repay, the employer needs to weigh the cost and likelihood of successful recovery.

For smaller amounts, pursuing legal action might not be cost-effective, and the employer might decide to leave the matter. However, if the sum is substantial or the employer wishes to take a clear stand on the principle, they could consider bringing a county court claim for debt recovery, which involves fixed costs being payable.

Before pursuing legal action, employers should seriously consider whether the former employee would realistically have the funds to meet a judgment debt if this course of action were pursued, as a judgment in their favour is only valuable if the individual has assets to satisfy it.

5. Reviewing and improving internal payroll processes

While handling existing overpayments is crucial, a truly proactive approach involves learning from these incidents to prevent future occurrences. Every overpayment of wages should trigger an internal review to identify the root cause, determining if it was a data entry error, a misinterpretation of a policy or something else, as understanding the cause is vital for prevention.

Employers should implement or improve robust internal controls within their payroll system, which could include dual authorisation, requiring two individuals to approve payroll changes or payments, utilising automated checks that flag unusual payment amounts or patterns, and conducting periodic internal audits of payroll records.

It is also important to ensure payroll staff are thoroughly trained on all relevant policies and procedures and to develop and communicate clear, concise policies regarding sick pay, leave, expenses and any other factors that could lead to overpayments. Finally, while the primary responsibility lies with the employer, educating employees about their payslips and encouraging them to review them regularly can also act as an early warning system.

How can overpayments impact an employee’s wellbeing?

The way an employer handles an overpayment of wages can have a significant impact on an employee’s wellbeing. Beyond the immediate financial implications, an overpayment, if mishandled, can lead to:

Stress and anxiety

Discovering an overpayment, especially if a significant sum, can cause considerable financial stress and anxiety for the employee. They may worry about how they will repay the money, particularly if they have already spent it.

Damage to trust and morale

An aggressive or unsympathetic approach to recovery can erode an employee’s trust in their employer and significantly damage morale. They may feel unfairly treated or blamed, even if the overpayment was genuinely an error.

Reduced productivity

Employees under stress are less likely to be productive and engaged in their work.

Reputational damage

Word travels fast. If an employer gains a reputation for being heavy-handed in such situations, it can harm their ability to attract and retain talent.

Impact on financial planning

Employees rely on their wages for their financial planning. An unexpected demand for repayment can disrupt budgets, lead to debt, and cause significant personal difficulties.

Therefore, approaching overpayments with empathy, transparency and a willingness to collaborate on a reasonable solution represents an investment in employee wellbeing and a positive workplace culture.

How can Sapphire HR help?

We provide complete support designed to empower employers and ensure compliance. Whether you need to establish fundamental HR policies and procedures, expert HR advice and support on demand, or ongoing dedicated HR support, our services are tailored to the specific needs and challenges of SMEs across the North East.

Additionally, we offer training services that can equip your payroll and management teams with the knowledge and skills to manage processes effectively, identify potential overpayments, and handle recovery procedures compliantly and empathetically.

By partnering with Sapphire HR, you can ensure that instances of overpayment of wages are handled professionally, ethically, and with minimal disruption to your business and your employees’ wellbeing. Contact us today to learn more about how our tailored HR solutions can support your organisation.