Overpayments are a common occurrence and ultimately may occur for a magnitude of reasons. Instances of an overpayment may be attributed to payroll errors, system faults or an employer’s mistaken belief regarding an employee’s entitlements. The increased frequency at which such overpayments occur makes it all the more important for employers to be aware of and understand their obligations when seeking to recover money from an employee. The following article provides a guide to navigating such an error to help you alleviate any awkwardness associated with this incident.
In the event of an overpayment, the error should be discussed as soon as reasonably practicable with the employee. The employer should disclose the date of the overpayment, the reason for the overpayment, and the amount that was overpaid. It is also best practice to apologise for any inconvenience caused and ensure the employee is made aware of the subsequent steps and actions that will be taken to correct the situation and prevent its recurrence.
Making a deduction
A deduction occurs when an employer ‘takes’ or withholds a portion of an employee’s pay before they receive it. Whilst some awards may contain a clause allowing an employer to deduct money from an employee’s pay without their agreement, the Health Professionals and Support Services Award 2020 does not expressly permit such a deduction. Therefore, any deduction from an employee’s pay must be done through written consent, or through what is commonly known as a ‘deductions agreement’.
Employers cannot automatically take money out of an employee’s pay to revert an overpayment. As such, the employer and the employee should discuss and mutually agree upon a repayment schedule. This agreement must be genuine, and an employee cannot be forced or coerced to sign an agreement. An agreement must be made in writing, and should include:
The amount to be repaid and the period in which the repayments are to be made should be reasonable. An employer should ask the employee how they would like to pay the money back, as well as the amount and frequency of each payment. Depending on how long has passed since the overpayment occurred, it may be unreasonable to expect the full amount be repaid a lump sum payment, meaning an employer may need to accept smaller repayments over a long period of time.
Subject to the written consent from an employee, an employer can correct an overpayment by deducting an agreed upon amount from an employee’s pay. However, there are some instances when an employer is not allowed to make deductions from an employee’s pay, including where:
If the overpayment was made in the current financial year, the employee is obligated to make any and all repayments in line with the repayment plan. Conversely, if an overpayment was made in a previous tax year, the employee must repay the total amount, and the payroll team will need to adjust payroll details for that year and reissue the company income statement.
It is also important that the employee resubmit their tax return to recoup the tax portion of the overpayment. To avoid any issues, it is best to make the repayments separately to the employer, as opposed to using a payroll system.
In addition to correcting mistakes as they arise, it is also essential to have systems in place to prevent any overpayments reoccurring. Ensure that your payroll team completes regular training around the use of payroll systems, and team members know where to go to get answers to their questions. It is also a good idea to undertake a third-party audit every few years, which will ensure that your payroll process, system setup, and staff capability is compliant.
To summarise, the following steps should be taken when dealing with an overpayment:
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