Millions of pounds are being lost per year to salary errors, often the time between an employee leaving and the payroll department receiving the information is so wide that one or two months’ salary is paid in error and the bigger the company, the greater the likelihood that the right hand won’t know what the left is doing; Larry Coltman, Partner and Head of debt recovery group at Reed Smith investigates.

An over-payment can arise for a number of reasons:

• 1. Where an automated payroll system makes an over-payment




• 2. Timing of payments under a contract of employment




• 3. When there is no written contract of employment




• 4. Human error

Most businesses now have an automated payroll system that makes payment direct to the employee’s bank on a given day of the month. Unfortunately, it is sometimes impossible to prevent a payment from being sent after an employee has left if adequate notice is not given to the employer’s bank. Payroll may also be outsourced, leading to similar problems. Failure to communicate in time can result in one or more additional monthly salaries being paid after the employee has left employment.

And the larger the business the greater the potential for mistakes. In a business with several subsidiaries and/or many employees, it may take some time for the wheels of communication to be oiled. The Human Resources department may not in any event be responsible for payroll which will involve a further link in the chain and allow more time for errors to occur.

The law in this area often favours the ex-employee – if they can show that they received the money in good faith and have already spent it, technically the over-payment cannot be recovered. This is known as ‘proprietary estoppel.’ However, this argument can usually be overcome if:

• 1. the contract of employment allows for recovery




• 2. the employee was notified as soon as is practical of the over-payment either by letter or at an exit interview




• 3. efforts are made to recover the over-payment promptly

In practice, even if the ex-employee is not notified within a reasonable time frame, they are usually reluctant to consult legal advisers and so there is a reasonable prospect of making a recovery, without having to get into this debate.

Obtaining full payment or any payment can prove difficult for a number of other reasons:

• 1. sometimes the ex-employee has no funds to make immediate payment




• 2. the ex-employee may no longer be working




• 3. the ex-employee has moved and their whereabouts are currently unknown

In the event that the ex-employee is unable to make immediate payment, agreement is reached for payment by instalments, which are constantly reviewed to ensure recovery over the quickest period possible. It is sometimes necessary to engage the services of tracing agents and carry out employment searches on a no trace – no fee basis to locate individuals and ascertain their current employment status.

Temporary staff including summer students, are often the hardest to collect from due to their financial circumstances and transient living arrangements. A sensitive and sympathetic approach to the recovery of this type of debt works best. A series of carefully worded letters may have the greatest response, while court proceedings should only be considered as a last resort.

To summarise, to limit exposure to salary over-payments employers should do the following:

• 1. check contracts of employment for payment terms and the right to recover an over-payment




• 2. ensure a clause exists allowing for re-payment of an over-payment




• 3. advise the employee about the over-payment at an exit interview and confirm in writing




• 4. advise the ex-employee about the over-payment as soon as is practicable where there is no exit interview




• 5. continue to pursue the over-payment immediately after notification.

Larry Coltman can be contacted on lcoltman@reedsmith.co.uk or T: 024 7629 3035