If you’ve been accidentally overpaid at work 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 employer can legally 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’s 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 to make their approach flexible and reasonable.
Where a large overpayment is discovered, it’s advisable for the employer to discuss this with the employee and try to agree on a program of repayment over a period of time (there’s no set time period).
If you can’t come to an arrangement about repaying your employer, you could use your internal grievance procedure to try and resolve the matter. You could also choose to sue your employer in a Civil Court if you felt they were being unfair and unreasonable in recovering the repayment. Your defence would be that you were led to believe that there was an entitlement to the money, it wasn’t your fault, and that, in good faith, you’ve “changed [your] position” in reliance on the money (this usually means you’ve spent it).
Organising repayment arrangements
If you can’t come to a repayment arrangement, the employer can take you to a Civil Court to recover the money. Clearly, at this point the employment relationship between you will have almost certainly broken down.
In both cases, the judge will consider whether the ‘injustice’ of requiring you to repay the money is greater than the ‘injustice’ to your employer of not receiving it. They’ll also consider what you’ve done with the money and how much effort you’ve 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 consider how easily you could achieve your employer’s repayment requirements.
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.
If you’ve now left the employer where the overpayment occurred, it’s obviously a slightly different situation as your former employer is unable to make a deduction from your wages. If, at some time after you’ve left employment, your former employer contacts you claiming that you owe them money that was overpaid 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 still owes their employer money when they leave their employment that couldn’t be recovered from final wages, the amount owed becomes a civil debt. If there’s 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 support in legal or employment matters.
Although overpayments for freelancers/sole traders may be unlikely (you’re more likely to have to deal with late payments), if you’re overpaid by a client, common sense says you should repay any overpayment to ensure you keep a good relationship with the client to secure future work. It’s 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 which can be referred to by both parties.
Overpayments for freelancers are made more complicated due to tax/VAT/accountancy implications, and it’s something you may want to take advice from your accountant about.
One possible way to deal with overpayments is if you’ll 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’s 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.