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I am an employer who has overpaid an employee. What should I do? As an employer, paying your employees on time and the correct amount is essential. However, keeping a close eye on payroll and every other aspect of your business can be challenging. Consequently, you might find yourself in a situation where you overpay an employee. This article will explore what an overpayment is and some key considerations to assess before taking action in relation to overpayments.

What Is an Overpayment?

An overpayment occurs when an employee receives more money than they were entitled to. It most often occurs due to an employer: 

  • making a payroll error, such as incorrectly entering data into a payroll system; or 
  • miscalculating a payment amount.

What Can I Do to Reclaim My Overpayment?

If you have overpaid one of your employees, you cannot simply fix the mistake by deducting the amount from the employee’s future pay. For such a deduction to be lawful, the deduction must be authorised in writing by the employee. Likewise, it must be principally for the employee’s benefit. It is also not otherwise authorised under the terms of a modern award or other industrial instrument – which is unlikely to be the case in the circumstances of an overpayment.

If you overpay an employee, you should attempt to reach an agreement with the employee to repay the amount. This process should involve informing the employee of the reason for the overpayment and implementing a payment plan as necessary. Additionally, you should put a written agreement in place, which includes the:

  • reason for the overpayment (e.g. calculation error); 
  • amount overpaid; and 
  • terms of the repayment plan.

An Example of an Appropriate Process

Aaron realises that he has overpaid one of his employees, Lachlan, by $1,000 over the last six months due to an error in his payroll software. Lachlan’s contract and award do not allow for deductions to be made for overpayments, and it is unlikely to amount to a lawful deduction regardless. Consequently, Aaron organises a meeting to discuss the overpayment. 

In this meeting, Aaron makes Lachlan aware of the overpayment and requests that he repay the money. Lachlan agrees. Aaron allows Lachlan to choose how he pays back the money (cash or bank transfer) and the amount and frequency of payments. 

Aaron writes up a simple contract for this arrangement, and both he and Lachlan sign it.

Key Takeaways

As an employer, dealing with overpayments can be a tricky process. If you have overpaid an employee, your business must follow an appropriate process. In claiming repayments for overpayments, you must ensure that you do not make any unlawful deductions. Likewise, you should follow a fair process and record any agreement to repay the amounts in writing. You and your employee may also need to seek tax advice where the underpayment occurs across financial years.

If you have any questions about correct processes when dealing with overpayments, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is an overpayment?

An overpayment occurs when an employer mistakenly believes that an employee is entitled to a higher pay rate or when a clerical or payroll error occurs.

Can I simply deduct the overpaid amount from my employee’s next payslip?

No. For such a deduction to be lawful, the deduction must be authorised in writing by the employee. The correct process would be to meet with the employee and agree upon a simple, written contract that will outline the reason for the overpayment, the amount overpaid and the terms of the repayment plan.

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