Earlier this year, an NHS trust landed itself in hot water after it asked staff to repay a one-off Christmas bonus that was wrongfully given to them. These types of mistakes, while common, can be difficult to negotiate, as any requests to return payments are rarely received well by employees and can create a hostile work environment. It is imperative that in these situations, businesses act quickly and decisively, taking swift action to recover the money while also managing delicate employee relations.

Common mistakes 

The two most common circumstances that lead to incorrect pay are:

• a ‘mistake of fact’, for example, human error; or
• a ‘mistake of law’, for example, if the national minimum wage is raised without the company knowing and adjusting.

However, regardless of how an error in payment occurs, the employer is always entitled to try to recoup the overpayment.

Recouping overpayments 

Most businesses have deduction clauses in their contracts which mean that they can take the equivalent sum from an employee’s future pay cheque. Deduction clauses mean that businesses do not have to go through the court system to recover funds as employees have already agreed to that solution upon signing their contracts, and businesses should seek to review or add in these clauses where appropriate to smooth the process should an incorrect payment occur. Equally, it is imperative that employers ensure that the affected payslips are clearly itemised and logged with HMRC to make the deduction lawful.

Typically repayments are taken in a series of instalments. However, an employer can also choose to take back the overpayment as a lump sum, using the employee’s entire paycheque if required, as correcting an overpayment is one of the exemptions listed by the law that ensures employees receive the national minimum wage.

Whilst a lump sum deduction is a legitimate option for employers, it is very unpopular among employees who depend on regular wages and would only be recommended in the case of an employee leaving the business, after which it would be impossible to recover the funds.

How to recoup an overpayment, when there is no deduction clause in place 

If a deduction clause is not in place, a business must go to court in order to recover the funds. In most cases the employer will be entitled to take the money back, but it should act quickly. If the mistake remains undetected or is not acted upon on after two months or so, employees can present a ‘change in circumstance’ defence which could mean that they have spent the money or that their financial position has changed making them unable to repay the sum.

Whether a business has deduction clause in its contracts or not, maintaining good relationships with employees needs to be a top priority, as it will be beneficial should a mistake in pay occur. Incorrect payment situations can damage a business’ reputation within the workplace long term if not handled sensitively, disrupting the day-to-day environment. To avoid this, employers should be as transparent as possible about how the mistake occurred, what is being done to amend it and what steps they will take to ensure it does not happen again. Any communication about the situation should be clear and professional, and come from a person in a position of authority or a member of the senior leadership team.

Preventing incorrect payments 

To prevent incorrect payments being distributed, businesses should have protocols in place for payment information being updated and checked prior to funds being transferred to the employees. This means ensuring that any promotions, change in hours or overtime payments are recorded at the time and verified prior to payday, creating an evidenced paper trail.

Businesses should also take steps to ensure that they are aware of any and all changes to relevant pay laws, such as the national minimum wage. Making HR teams aware that they need to keep up-to-date with this and any other legislative changes that affect employee’s pay will increase the chance that the change is noticed and can be acted upon prior to the next payday, mitigating the risk of mistakes.

Diligence is imperative to avoiding any form of incorrect payment and having measures in place to avoid them occurring will not only keep a business from potentially going to court, but will also maintain employees’ trust. If a mistake is made, solving it quickly and efficiently in a sensitive manner will be beneficial for both the business and its employees.

Employment

Contact: Matt McDonald  matt.mcdonald@shma.co.uk

Philip Pepper philip.petter@shma.co.uk