Employee overpayments: can employers seek repayment?

Few issues attract more scrutiny from employees, unions, regulators, and the media than payroll mistakes, and for good reason. Paying employees correctly and on time is one of an employer's most fundamental obligations.

Unfortunately, for a variety of reasons, payroll mistakes are an uncomfortable reality for employers, yet they are rarely easy to resolve and can result in an employee receiving more than they are entitled to.

Can an employer recover an overpayment?

As a general proposition, money paid by genuine mistake or error may be recoverable through a claim of restitution.[1] The employer will ordinarily need to establish that the payment was made because of a mistake and that the employee was not entitled to retain it.[2]

The employer will need to confirm when and how the error occurred, whether the payment was genuinely mistaken and whether there were any offsetting underpayments.

The existence of a right to recover the overpayment does not, however, give the employer an unrestricted right to deduct the overpayment from the employee’s wages.

Restrictions on deductions from wages

Section 324 of the Fair Work Act 2009 (Cth) limits the circumstances in which an employer may deduct an amount from money payable to an employee. Broadly, a deduction must fall within one of the statutory categories, including where it is authorised by legislation, a court order, a modern award, an enterprise agreement or an order of the Fair Work Commission.[3]

Deductions from an employee’s pay are also subject to additional requirements, including that the deduction be principally for the employee’s benefit.[4] This requirement is significant, because it is clearly difficult to argue that a deduction intended to reimburse the employer for an overpayment is for the employee’s benefit. Employers should therefore not assume that an employee’s written consent, or a broadly worded deduction clause in an employment contract, will be sufficient to make a payroll deduction lawful.

Reaching a repayment arrangement

In most cases, the practical starting point is to speak with the employee and attempt to reach a reasonable repayment arrangement.

The Fair Work Ombudsman recommends that the employer and employee discuss the overpayment and record any agreed repayment arrangement in writing.[5] The agreement should explain the reason for the overpayment, the amount to be repaid, the method of repayment and the frequency of instalments.[6] The repayment terms should also be reasonable in the circumstances.[7]

What if the employee refuses to repay?

If the employee disputes the calculation or refuses to enter into a repayment arrangement, the employer should not respond by automatically withholding wages or other entitlements. The employer should first consider the issues raised by the employee and recheck the calculation.

If the dispute cannot be resolved, the employer may then issue a formal demand for repayment and consider negotiation.

In some cases, it may be necessary to commence legal proceedings. Whether litigation is appropriate will depend on the amount involved, the strength of the employer’s evidence, applicable limitation periods and any defence raised by the employee.

Employers should obtain legal advice before commencing proceedings.

The change of position defence

An employee may seek to resist repayment of an overpayment on the basis that they have changed their position in good faith in reliance on the overpayment and that it would therefore be inequitable to require repayment.

In Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 14, the High Court of Australia considered mistaken overpayments and the defence of change of position. The Court held that the relevant inquiry was whether, in all the circumstances, it would be inequitable to require repayment.[8]

The defence is highly dependent on the particular facts. It will not necessarily be established merely because the employee has already spent the money. Relevant considerations include whether the employee honestly believed they were entitled to the payment, whether they knew or should reasonably have appreciated that an error had occurred, and whether they made an irreversible financial decision in reliance on the payment.

Good faith will be difficult to establish in circumstances where an employee knew they were being overpaid, deliberately remained silent and then spent the money in an attempt to avoid repayment. In Civil Aviation Authority v Jorm (1994) 56 IR 89, recovery by the employer was permitted in circumstances where the employee knew of a substantial overpayment and purposely changed their position.

Key takeaways

Employers can often seek recovery of money paid to an employee by mistake, but the recovery process must be handled carefully.

Sparke Helmore can provide tailored guidance and advice on the legal recovery process should an employee refuse to repay a payment made in error. 

Please note: This article does not constitute legal advice and should not be relied upon as such.  Formal legal advice should be sought in particular matters.

[1] David Securities Pty Limited and Others v Commonwealth Bank of Australia [1992] HCA 48; Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 14.

[2] Ibid.

[3] Section 324 Fair Work Act 2009 (Cth)

[4] Ibid.

[5] https://www.fairwork.gov.au/pay-and-wages/deductions-and-related-issues/overpayments

[6] Ibid.

[7] Ibid.  

[8] Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 14 at [1] and [69].