Have you made an overpayment of wages to an employee?

If an employer overpays an employee can he always recover that overpayment?

The Employment Rights Act 1996 says that an employer is not authorised to make a deduction from an employee’s wages unless the deduction is authorised by statute (i.e. tax and NIC), or the worker has given prior written consent to the deduction being made.  If such deductions are made the employee is entitled to make a claim under Section 13 of the Act.  However, in practice, a claim against deductions made by the employer for overpayments of wages or expenses is unlikely to be successful.

So, generally speaking, an employer is allowed to recover overpayment of wages from an employee so long as he or she is still employed by them.  The deduction can be made either by a lump sum or instalments and can be taken directly from the employee’s wages.

What should you do before seeking legal advice?

1. Check your documents.
    
2. Write to your employer 
    
3. You have 3 months less one day to make a claim to the Tribunal.
   If you do not receive a response to your letter say within 7 days then contact ACAS Early Conciliation to commence the early conciliation process as this is a requirement before you issue a claim in the Tribunal. If you are not able to reach an agreement during this process (e.g. they do not co-operate and you don’t get paid) then you will need to consider issuing a claim.

However, if the employer seeks to recover an overpayment after the employee has left the company, the employee may be able to resist recovery on a legal principle known as estoppel, which prevents anyone from taking action on a matter that has been already settled.  For the defence of estoppel to apply:

• the employer must generally have made a representation of fact which led the employee to believe that he was entitled to treat that money as his own;
• the employee must, in good faith, have “changed his position”, in other words spent some or all of the money;
• the payment must not have been primarily caused by the fault of the employee.

In County Council of Avon v Howlett a teacher was overpaid sick pay.  He queried the payments at the time but was told they were correct.  By the time the Council realised its mistake the teacher had spent most of the money.  The Court of Appeal decided that the defence of estoppel prevented the Council from recovering the full amount of the overpayments.

Since the Avon case there have been further developments in this area of the law and the House of Lords has formulated the more flexible defence of “change of position”, which involves a recipient not having to pay any or part of an overpayment if it will be unjust for them to do so.  So where an overpayment is made and the recipient spends part of it, they can be ordered to repay the money that they have not spent.

If the Employment Tribunal decides that a deduction was made unlawfully, the employer forfeits the amount that the tribunal orders to be paid or repaid.  In Potter v Hunt Contracts Limited the worker owed the employer £523.00 under a loan.  When he left the company the employer refused to pay him his wages of £278.50.  The employee brought a claim for deduction of wages and the tribunal ordered the employer to pay the £278.50 it had withheld.  In these circumstances, the employer was only entitled to recover the excess of the loan in the civil courts.  So the employer’s actions in withholding wages meant that it only received £244.50 and not the full amount of the £523.00 loan.

Employers should note that where they provide employees with loans, for example for a season ticket or for training costs, they must ensure that they have the written authority of the employee to deduct monies from wages or they may fall foul of the Potter v Hunt rule.