Frequently Asked Questions
Can an employer deduct overpaid wages?
Yes — employers can recover wage overpayments as a debt. Under Employment Rights Act 1996 s13, they can deduct from future pay but are limited to 10% of net wages per pay period unless the employee consents to more.
What notice must an employer give before deducting?
The employer must have given prior written notice of the right to make deductions (in the employment contract or a specific overpayment agreement). Deducting without this may be an unlawful deduction claim.
What if the employee disputes the overpayment?
The employee can raise a grievance. If the employer deducts anyway, the employee can bring an unlawful deduction of wages claim to an employment tribunal (3-month time limit).
Can an employer claim for overpayment after employment ends?
Yes — the employer can sue in the county court for the debt. The limitation period is 6 years. However, the employee may have a defence if they spent the money in good faith believing it was correctly paid.
What is the 'change of position' defence?
If an employee spent overpaid money genuinely believing it was correctly paid, and it would be unjust to repay it (e.g., spent on necessities they would not have otherwise bought), they may have an equitable defence.
Does overpayment recovery reduce wages below NMW?
No — deductions for overpayment cannot reduce net pay below National Minimum Wage (£12.21/hour for 21+). If they would, the deduction amount must be reduced.
What about tax on recovered overpayments?
If wages were overpaid in a prior tax year, HMRC may need to amend the PAYE record. The employer should notify HMRC and issue a corrected P60 or P11D. The employee may receive a tax refund.
Can the employer recover overpayment from a leaver?
Only if the employment contract or a specific agreement authorises deduction from final pay. Otherwise, the employer must sue separately through the courts.
Is there a time limit to notify the employee?
No statutory time limit, but prompt notification is important. Significant delay may reduce the employer's moral position and affect recovery. Best practice: notify within 1 month of discovering the overpayment.
What if the overpayment was caused by employer error?
The employer can still recover it — even employer-caused overpayments can be reclaimed. However, courts may be less sympathetic to the employer's claim if there was significant delay in identifying the error.
Can overpayment be offset against holiday pay owed?
Yes — employers can offset overpaid wages against holiday pay owed to the employee, provided this is covered by the employment contract or agreed in writing.
What records should I keep about the overpayment?
Keep payroll records showing the overpayment, written notification to the employee, signed agreement for recovery, and records of deductions made. This is essential for any future dispute.