What happens in circumstances where an employee is inadvertently overpaid?

Naturally the first thought may be to simply deduct the overpayment from the employee’s next pay. Unfortunately, it is often not as simple as that and such action may be unlawful. 

The answer to correcting an overpayment often depends on the reason for the payment, the amount of the payment and the regularity of the mistaken payment. 

It is important to act quickly for morale, business and legal reasons. 

The first port of call is to talk to the employee.  Tell them of the mistake, tell them it is not their fault and ask the question of whether they are able to return the overpayment.  Be considerate of any response particularly if it is difficult for them to get the money back straightaway or that they have paid a debt with the money. The employee may need some time. 

If necessary (and in most cases applicable), put the request for repayment and any proposed terms of that repayment in writing. 

Secondly, check the employment agreement or relevant Award scheme.  Our employment agreements and some Awards allow for deductions to correct overpayment whether made by mistake or otherwise.  Having a policy covering such issues is useful, particularly to provide a solution for unforeseen future occurrences.   

However, if that is not the case, it becomes more essential for you to talk to the employee and try and come to an arrangement for the repayment of the money either as a lump sum or in instalments.  Be considerate and give your employee time. 

If any agreement is reached, it is important to document the agreement and put in writing. Make sure the payslip reflects the agreement and the reason for deductions and/or the repayments. 

Do not take any action against the employee if they negotiate terms or timing, or even refuse to pay back the overpayment.  Such action will most probably be unlawful and make a difficult situation much worse. 

If an employee does refuse to pay back an overpayment made by mistake, talk to John Davies or Robert Lamb at Hillhouse Legal Partners. 

We will discuss with you the best way to legally recover the overpayment and what defences the employee may have to any possible legal action.  Legal action, especially Court action is undeniably the last resort as, amongst many other reasons, the person may well still be a valued employee.

Further, for the employer, there may also be taxation considerations to contemplate and much of this depends on when the mistake is found and when the repayment was made.  Hillhouse Legal Partners can work with you and refer you to the appropriate experts in this field as well. 

Mistakes happen but don’t make it worse.  

At Hillhouse Legal Partners, we are experienced in employment law matters and can assist employers through what is frankly a complicated and ever changing system of laws, rules and regulations. To discuss employment law further please email Robert Lamb or John Davies on phone us on 07 3220 1144.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.