Managing Overpayments

04 April 2024

How to manage overpayments with your Employees

Overpaying an employee can happen for several reasons such as payroll errors, miscalculations, or misunderstandings. While it’s an uncomfortable situation for both parties, it’s crucial to handle it professionally and ethically. Simply making deductions from pay without the steps below may be considered unlawful deduction from wages, which would be deemed a breach of contract.

In this blog, we will explore the steps you can take to rectify the situation when an employee has been overpaid.


Talk it through

The first step is to have a candid conversation with the employee. Schedule a meeting in a private setting to discuss the overpayment. Approach the conversation with empathy and understanding, recognising that mistakes can happen. Clearly explain the situation and provide details on how the overpayment occurred. Encourage the employee to ask questions and express any concerns they may have.


Agree on a rate of repayment

Work together with the employee to determine a reasonable rate of repayment. Consider the employee's financial situation and ensure that the repayment plan is fair and manageable for them. Discuss options such as a lump sum repayment or spreading the repayment over several pay periods. Be flexible and willing to accommodate reasonable requests to ensure a smooth resolution.


Get written confirmation

Once you have agreed on a repayment plan, it is essential to document the terms in writing. Draft a repayment agreement outlining the amount of overpayment, the agreed-upon repayment schedule, and any other relevant details. Both parties should review and sign the agreement to acknowledge their understanding and commitment to the repayment plan. This written confirmation protects both the employee and the employer and serves as a reference in case of any future disputes.


Ensure contracts allow for deductions

It's essential to review your contracts of employment to ensure they allow for deductions in cases of overpayment. Clearly outline the conditions under which deductions can be made to avoid any misunderstandings. If necessary, seek professional HR support to ensure your contracts are compliant with relevant regulations.


Separate agreement for repayment

If your company has clear repayment requirements, such as recouping training fees from employees who leave, you must ensure a separate agreement is in place. This agreement should clearly specify the terms of the repayment arrangement, including the amount to be repaid and the repayment schedule. A separate, costed agreement, signed by both parties can avoid ambiguity and is a requirement if such repayments need to be sought through the courts.


What to do when you have overpaid an employee who has left

If you discover that you have overpaid an employee who has already left the organisation, the process becomes slightly more complex. Reach out to the former employee via email or phone to inform them of the overpayment. Provide details on the amount overpaid and request repayment according to the terms of their exit agreement or any applicable organisation policies. If necessary, be prepared to explore legal options to recover the overpayment such as small claims court; but do consider if the money is worth recouping due to the potential legal costs.


How to avoid future errors

To prevent similar errors in the future, implement measures to improve your payroll and accounting processes, such as an automated payroll system which can help minimise human errors. Regularly review payroll records and conduct audits to identify and rectify any discrepancies promptly. Ensure payroll is checked before it is processed. Provide training to staff members involved in payroll processing to ensure they focus on the detail, and fully understand the procedures and protocols.


While overpaying an employee can be a stressful situation, handling it promptly and professionally is essential to maintain trust and integrity in the workplace. By having open communication, agreeing on a fair repayment plan, obtaining written confirmation, and implementing measures to prevent future errors, you can effectively address the issue and mitigate any potential negative impacts on both the employee and the organisation.


How can Haines watts help?

Remember, mistakes happen, but it is how we address and learn from them that truly matters. For support with managing overpayment and repayments from employees, please get in touch.


The content of our blogs is intended for general information and not to replace legal or other professional advice.