(This post will not receive any further updates after April 2017).
If you have been accidentally overpaid by your employer, it may seem like a lucky bonus, but don’t assume you can keep the money! Here we look at overpayments for Employees and Freelancers/Sole-Traders.
Where an employer has made an accidental overpayment of wages or expenses (including holiday pay), the legal position is that the employer can recover this overpayment from an employee by deducting the amount from future wages or salary. The situations where an Employer can make deductions from your wages are limited but this is one situation that is allowed by legislation (see our full article about authorised and unauthorised deductions from wages).
However, this can become complicated.
- If an employer makes an overpayment in one pay month/week, it should be relatively straightforward for them to deduct this in the following pay period.
- If the employer has made overpayments over a long period of time (perhaps due to a payroll error) or where the overpayment was made some months ago and has only recently come to light, the employer needs to tread carefully in recovering the money.
- Although Employers can make deductions for the overpayment without your agreement, if a large amount is owed they should be careful in their approach and be flexible and reasonable.
- Where a large overpayment is discovered, it is advisable for the employer to discuss this with the employee and try to agree a programme of repayment over a period of time (there is no set time period).
- If you cannot come to an arrangement about repaying your employer you could use your internal grievance procedure to try to resolve the matter. You could also choose to sue your employer in a Civil Court if you felt they were being unfair and unreasonable to recover the repayment. Your defence would be that you were led to believe that there was an entitlement to the money, it was not your fault, and that, in good faith, you have “changed [your] position” in reliance on the money. This usually means that you have spent it!
- However, if you cannot come to an arrangement to repay the money the employer also can take you to a Civil Court to recover the money. Clearly at this point the employment relationship between you will have broken down though!
- In both cases the Judge will consider whether the ‘injustice’ of requiring you to repay the money is greater then the ‘injustice’ to your Employer of not receiving it. They will also consider what you have done with the money and how much effort you may have made to report the overpayment, whether you received payslips (legally it is one of your employment rights that you should receive an itemised payslip). They may ask you to repay some, all or none of the money and will look at the repayment requirements your employer has and how easily you could achieve that.
- In some cases it might be practical for the employer to consider writing off part of the overpayment rather than become involved in legal proceedings to recover the full amount.
However, if you have now left the employer where the overpayment occurred, it is obviously a slightly different situation as your former employer is unable to make a deduction from your wages. If, at some time after you have left employment, your former employer contacts you claiming that you owe them money that was overpayed in your former employment what will happen?
This will depend on what was written in your old employment contract – some contracts state that, if an employee leaves the employment owing the employer money that could not be recovered from final wages, the amount owed becomes a civil debt. If there is no contractual provision to treat the alleged overpayment as a civil debt, the employer may have considerable difficulty in enforcing payment if you refuse to cooperate. In either situation, you should obtain advice from an organisation providing advice on legal or employment matters.
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Although overpayments for freelancers / sole traders may be unlikely (you’re more likely to have to deal with late payments!), if you are overpaid by a client then common sense says you should repay any overpayment to ensure you keep a good relationship with the client to secure future work. It is always advisable that your work with the client is covered by a form of contract that should specify when and how much you’ll get paid and which can be referred to by both parties.
Overpayments for freelancers are made more complicated however due to tax / VAT / accountancy implications, and it is something you may want to take advice from your Accountant about.
One possible way to deal with overpayments is if you will be issuing future invoices to the client. You could just leave the overpayment and allocate them to the next invoice you send in as a credit, showing the previous invoice number (so a deduction from your total amount owed). However, if it is likely to be the last invoice to that client, you can send them a credit note referring to the invoice number. We suggest you speak to your client and your accountant if this happens to you!
If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to us at The HR Kiosk (click here) – a Human Resources Consultancy for small businesses – you can retain us for as much time as you need.
Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.