A recent tabloid headline raised more than a few eyebrows in HR circles: “Man resigns after being paid 330 times his salary by mistake – and is allowed to keep it”. At first glance, it reads like every employer’s worst nightmare. However, as so often, the reality sits behind the headline. The individual was working in Chile, and the decision allowing him to keep the money arose in the context of criminal proceedings, not a civil claim. With that important distinction in mind, let’s look at how overpayments of wages are treated under UK law.

The basic position

Where an employee has been overpaid, the most straightforward option for an employer is often to recover the overpayment by making deductions from future salary payments over a period of time.

Normally, any deduction from wages must be authorised by statute or permitted by the employment contract. However, these restrictions do not apply where an employer is recovering an overpayment of wages or expenses (s14 Employment Rights Act 1996).

This means there is no requirement for a contractual deduction clause and no need to obtain the employee’s consent. An employee cannot argue that such a deduction amounts to an unlawful deduction from wages under s13 Employment Rights Act 1996.

What overpayments are covered?

‘Wages’ are defined broadly and include not only basic pay, but also expenses, holiday pay, bonuses, commission, and most statutory payments (including statutory maternity pay and statutory sick pay).

What happens where the salary error is put in writing?

There are some important grey areas. An overpayment caused by an error in the employee’s contract will not necessarily be treated as an overpayment of wages.

In Keenan v Barclays Bank, Mrs Keenan’s salary was mistakenly increased to a full-time rate even though she continued to work part-time. Barclays confirmed the higher salary in writing and did not identify the error for three years. When the mistake eventually came to light, the tribunal held that the bank could not recover the excess payments as an overpayment of wages, as the new salary had been formally confirmed.

Are there any limits on how much can be deducted?

Perhaps surprisingly, there are very few limits. Deductions made to recover an overpayment are disregarded when assessing whether a worker has been paid the national minimum wage. As a result, deductions can lawfully reduce pay in a pay period below the minimum wage threshold.

However, employers do need to act reasonably when seeking to recover overpayments. An insensitive or heavy-handed approach to recouping an overpayment risks a breach of the implied term of mutual trust and confidence by the employer which, if the employee resigns in response, could give rise to a claim for constructive dismissal.

What if the employee has left employment by the time the overpayment is discovered?

In the Chilean case, the employee had resigned and left employment before the overpayment was identified. If the same situation arose in the UK, the employer would still have potential routes to recovery.

An ex-employer could bring a civil claim to recover the overpayment, either relying on an express contractual right (if one exists) or on the basis of unjust enrichment. Unjust enrichment applies where money has been paid by mistake, but these claims can be more complex. A former employee may argue that they changed their position by spending the money in good faith.

For this reason, timing is critical. The longer the delay in identifying and addressing an overpayment, the harder recovery is likely to be.

Key takeaways

  • Employers have statutory rights to recover wage overpayments through payroll deductions, even without contractual authority or employee consent.
  • Errors confirmed in writing – particularly contractual salary changes – may fall outside the usual overpayment rules.
  • Acting quickly is essential, especially where an employee has left employment.