"Oops – I overpaid an employee, what now?"

by Tammy Buckley & Edward Cranswick

Mistakes happen, but overpaying employees can prove to be a costly one, as the law won’t necessarily help an employer recover the funds. To help navigate this tricky topic, Karen Radich, barrister with Clifton Chambers, spoke to us to provide some useful tips for managers who have overpaid an employee.

Can you just make a deduction from their next pay?
Where an overpayment has occurred, it is possible the employer can recover the amount overpaid, as the vast majority of employment agreements contain a "deductions clause", under which the employee consents to the employer making deductions from future wages.

But prior to deduction, they must engage in a consultation with the employee in question (Radich says this is a relatively new part of the law). It’s this aspect that can create a potential obstacle for employers – as it has the potential to disrupt the pre-authorised consent given in the contract of employment.

“And the practical issue that arises is you go to your employee and you say: ‘We’ve overpaid you, we’re proposing to deduct it from your next three salary payments’, and the employee can at that stage turn around and reply: ‘Well I withdraw my consent. You’re not allowed to do that.’ And they can withdraw that pre-given consent at that time, and that leaves the employer in the position where they can’t deduct from wages.”

While this might be an annoying caveat from the employer’s perspective – Radich says it’s important to keep in mind the perspective of the employee, and whether or not it seems fair to simply pull back money from the employee’s next expected pay.

“If you step back here, the employee usually has done nothing wrong. It’s the employer who has overpaid – something has gone wrong in the processing of payments or whatever … And the employee hasn’t done anything wrong – the money has simply landed in their bank account.”

Radich cautions employers from reaching into an employee’s holiday pay to recoup an overpaid amount.

“For employers who are making deductions, holiday pay is more sacrosanct – moreso than wages. Holiday pay is protected because it’s protected by the Holidays Act. So when an employee leaves an employee may be owed regular pay and holiday pay, and when an employer starts to deduct from the holiday pay they tend to get more into trouble.”

Radich also notes that in recent years there seems to have been an uptake in the number of labour inspector prosecutions targeting employers who make deductions illegally from their employees. Not only might the employer have to pay back the money deducted, but they may also be hit with a hefty fine.

“And there’s been some really significant penalty awards – sometimes up to $100 000 sort of thing … I’ve seen an increase in the last two or three years, where the labour inspectors are seeking quite significant penalties.”

If you can’t deduct, what can you do?
The Wages Protection Act also entitles the employer to recover overpayments in certain circumstances but it provides a limited time window for recovery. Notice of intention to recover the overpayment need to be promptly given and the overpayment itself must be recovered no later than two months after the notice is given.

But in cases where these options don’t apply, Radich advises the onus is on the employer to show the payment was made by mistake, under duress, by an illegality (such as theft) or another similar ground.

Additionally, where an employee doesn’t realise that the payment has been made to them in error, or realise that the overpaid funds have been received (which can happen with drip-fed overpayments made over a period of time), they may have changed their position in reliance on those funds – meaning that the employer cannot then recover the overpayment.

“Section 94B of the Judicature Act 1908 provides that where a payment is made by mistake, if the person receiving the payment has done so in good faith and then altered his or her position in reliance on the payment, the Court can decide not to grant relief to the claimant,” Radich explained.

“To give a couple of examples, if an employee is overpaid wages by mistake and doesn’t realise this, they may have received the funds in good faith [they honestly didn’t realise they’d been overpaid] and then saved up for an overseas holiday or to paint their house. In such cases, the funds have been received and spent in good faith and it will be very difficult for the employer to recover them. However, an employee who has bought a new car with the funds, may be able to sell it and return the money. These are the sorts of factors the Court will bear in mind in deciding whether to make an order against the employee.”

In a 2012 Employment Relations Authority (ERA) decision Air New Zealand (Foai v Air New Zealand) was unable to reclaim $42,635 it overpaid one of its workers for 16 months.

While the man told both his manager and the HR manager he was concerned he was being overpaid and then asked the payroll staff about the situation, he was repeatedly assured that all was as it should be. By the time the company finally realised it had been overpaying the man, it was too late for it to recover the money under the Wages Protection Act, so it instead made a claim under the common law of restitution.

However, Air New Zealand was unable to establish that it had been mistaken in its overpayment and the Court also found the man had acted in good faith by bringing the situation to the attention of his superiors’.

In a recent ERA decision (Stages Civil and Electrical Ltd vs Cook) the ERA ruled that the employee did have to repay the wages.

Stages Civil and Electrical Ltd (SCE) overpaid an employee $7,164.96 after an additional number was entered into the gross pay line. The mistake was picked up two days after the pay run and an email along with supporting documents was sent to the employee highlighting the overpayment and requesting reimbursement. SCE received an email requesting further information, which was provided. However thereafter SCE failed to get a response from the employee.

The ERA ruled that the overpayment was a simple mistake and gives rise to a right to restitution.

So – what to do?
Proactive employers will take the necessary steps to make sure overpayment doesn’t become an issue. Radich says it’s something that, surprisingly, is often overlooked when running a business – particularly smaller businesses that might be more focused on the service they’re providing than the accounting aspects of running a business.

“Get your payroll right to start with. Make sure the payroll practice is robust, and they self-audit or externally audit, and make sure what they’re actually doing is correct. Because if you’re a car yard then your business might seem like it’s just selling cars, but also you need to make sure you’re paying your employees correctly. And it’s one of those things that’s not always thought of as something you need to do to make sure your business succeeds.”

And if you have accidentally made an overpayment?

 “The first thing to do after it comes to light is to get everything together, to organise things so there’s a paper trail of what’s happened. And then sit down with the person and talk to them. Sit them down and say: ‘This is what’s happened, here’s the money going into your bank account, here’s what you should have got,’ and talk to them quite carefully about how the issue has arisen.”

Radich says to be respectful and prudent when conducting such a conversation because “nine times out of ten this will come as quite a shock, and they have spent the money already” and “they might get upset, because now they feel they owe their employer a whole lot of money” which they hadn’t accounted for in budgeting their daily lives.

“Approach the conversation in a moderate fashion, because that way you’re more likely to have the employee be receptive to cooperating and working out a payment program or some way for the money to come back. I think if the employer takes things too aggressively then the employee is more likely to act badly.”

Employers should be prepared that they might not be able to recoup all the money, because the employee may have relied on it in good faith. But if employer and employee enter into a negotiation from a position of goodwill and respect for their ongoing employment relationship, an agreement might be reached whereby the employee pays back a lesser, reasonable amount.

This article was written originally by Tammy Buckley on 31 March 2014. It has been expanded and updated by Edward Cranswick.