Overpayments and salary errors are costing businesses millions of pounds a year, in our latest article we looked at why it happens – here Ranjit Dhindsa, Head of Employment at the Midland office of International law firm Reed Smith looks at how to recover those salary slip-ups.

Overpayments can be made in a variety of ways – holiday, notice monies, expenses and/or bonuses to name but a few.

Employers, can also find themselves in a situation where they need to recover payments that have been made including loans to study, relocation and accommodation expenses.

In these circumstances there are two choices:

• recover overpayments or debts via an Employment Tribunal




• or through the civil courts

There are advantages and disadvantages associated with each option. The Employment Tribunal procedures are less cumbersome (particularly if the employee is already pursuing a claim against the employer), and the case is likely to be heard of and disposed of faster. However, each side is responsible for their own legal costs. In the civil courts however, it is still possible to recover costs and interest, particularly if no defence is filed.

What employers should not do though is set off any over payments made or sums owed against for example, notice monies owed to the employee at the termination of employment. This is particularly the case where an employer has not included in the contract of employment an express right to deduct sums of money in this way or the right to recover loans made as a debt.

If an employer did do this then an employee could bring a claim in the Employment Tribunal for either unlawful deduction from wages or damages for breach of contract.

If there has been an unlawful deduction from wages, then the employee does not have a duty to mitigate that loss, and can recover all the sums due. However, with a breach of contract claim an employee does have a duty to mitigate their loss and more importantly the employer can then set out in the Employment Tribunal proceedings a counter claim against the employee for the sums that the employee may owe the company.

How the employee makes the claim is therefore quite important particularly when employers are looking to defend their position.

The statutory provisions only allow employers to make deductions if they are required to by law (for example, income tax and national insurance contributions) or have the right to do so from the contract of employment or have the workers written consent or agreement. In limited circumstances a genuine error and overpayment can be corrected. There is also an exception in the case of workers in retail employment where deductions on account of cash shortages or stock deficiencies must not exceed 1/10th of gross wages.

However the statutory provisions are underpinned by a general common law duty that the employer must act fairly and reasonably.

A mistake that employers often make is not to review their contracts of employment regularly or to try and obtain employees consent to make deductions but not document that in writing.

This can cause difficulties in an Employment Tribunal where the employer is trying to defend their position.

If the employee does not bring a breach of contract claim in the Employment Tribunal then the employer cannot make a counter claim. In those circumstances the employer would have to issue proceedings in the civil courts to recover sums of money owed as a debt.

In order to succeed in such claims, it is important that the employer can show that the employee was aware that repayments would have to be made regularly. The drafting of loan agreements either as stand alone agreements or as part of a contract of employment are therefore vital.

We have a number of clients who have invested heavily in employees by supporting training and professional development such as MBA’s, who find themselves in a situation where their investment has been wasted because the individual leaves and they cannot recover the costs of the study.

The position is even worse with employees who claim extensive expenses, or who may be required to travel a lot. We have had a number of cases involving senior executives who have been fraudulently claiming expenses which the company again is unable to recover because of a gap in the contractual documentation.

The key to this is to ensure that employers are able to issue proceedings and defend proceedings successfully by ensuring that they have reserved the right to recover overpayments or loans, in the contracts of employment.