Overpayments made to employee can be a result of a misinterpretation of an employment agreement, a clerical error, or technical fault in the payroll system. Overpayment of wages can also occur when benefits are overpaid such as holiday pay and annual leave cash up. Regardless of the cause, employers are not always able to recover the overpayment via a deduction from subsequent earnings.
In this guide for employers and business owners, the rights and duties of employers are explored in respect of overpayments. Please note that the information below is general and is not intended to act as advice.
Overpayments of wages
If an employer overpays an employee on a single occasion due to miscalculations or errors (for example, a typing error on payroll entry or a system failure), the employer should first agree with the employee on how and when the overpayment is to be reimbursed to the employer. An employee should provide written consent for the overpayment to be deducted from their wages.
Deduction from wages for overpayments in limited circumstances
Where it was not reasonably practical for the employer to avoid making an over payment due to their payroll system, they can deduct such overpayments from an employee’s pay without their written consent in the following instances only:
- If the employee is absent from work without the employer’s agreement
- If the employee is on strike or locked out (as part of collective bargaining)
- If the employee is suspended (if seeking to suspend without pay, please seek advice)
In this instance the employer must provide the employee with notice of its intention to make such deduction which must be made within two months of the overpayment being made.
Such notice must be given to the employee before their next normal pay day.
There are special rules for notice for employees who:
- Do not have a fixed workplace
- Do not go into the workplace during working hours, or
- Work from more than one workplace
Overpayments legislation
Under the Wages Protection Act 1983 (the Act), there are limits to when an employer can make deductions from an employee’s wages. In terms of the Act, employers can only make deductions such as (overpayments) from subsequent wages if the employee agrees in writing to such deduction.
In cases where the employee does not provide written consent, propose a specific deduction from subsequent wages in terms of a general deductions clause contained in their employment agreement.
Some individual employment agreements have a general deductions clause (with no mention of a value), in terms of which the employee agrees that an employer can deduct from subsequent wages, any monies owing to them or for damages caused by the employee.
However, an employer cannot simply make specific deductions (i.e. of a certain value) from the employee’s subsequent earnings under the general deduction clause without first consulting with the employee. In terms of the Act, an employee can vary or withdraw their consent to general deductions from their pay, in which case the employer would not be permitted to proceed with the overpayment deduction.
Recovering overpayments
In cases of overpayment not related to unauthorised absence, strikes, lockouts or suspension, then:
- The employer should first advise the employee of the overpayment and propose that the deduction is made in terms of the general deductions clause.
- The employee should be permitted to consult with the employer, providing their feedback on the proposed deduction.
- If the employee provides no feedback to the proposal or does not withdraw their consent under the general deductions clause, then the employer can proceed with the deduction.
- However, if the employee advises that they do not consent or that they withdraw their consent to the deduction, then the employer cannot recover the overpayment via a deduction from subsequent earnings.
Should the employee fail to recover the overpayment via a deduction from the employee’s pay, then the employer has the option to proceed with a statement of problem in the Employment Relations Authority as a means of recovering the overpayment.
Payment plan
If an employer has overpaid an employee, the best way to recover the funds is to offer a flexible repayment plan. This can be done as weekly or fortnightly deductions from the employee’s wages to minimise the financial hardship to the employee. This arrangement must be agreed in writing and signed by the employee.
Overpayment policy
An overpayment policy can help reduce the risk of conflict, misunderstandings and costs of litigation.
An overpayment policy should be outlined in the Employee Handbook and should contain the following information:
- The circumstances where an overpayment can be recovered.
- How to notify management about an overpayment.
- Who is responsible for managing overpayments.
- The type of re-payment options available to employees.
- How to recover money owed from employees who leave the company.
Manage entitlements with Peninsula
Peninsula offers customers access to software, tools, factsheets, and policies that help them avoid errors and create strong workplace systems. We have supported thousands of businesses in New Zealand in matters of employment relations and health and safety at work. For further advice on how to manage overpayments at work, contact Peninsula on 0800 658 726.
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