It is not that uncommon for employers to mistakenly overpay an employee, or to allow employees to take leave in advance, resulting in a benefit to the employee. The question then arises as to whether the employer can recoup the overpayment.
Generally, an overpayment to an employee usually occurs in the following circumstances. The first when there is a clerical error such as incorrect data entered into the payroll software and/or incorrect record keeping which results in the business unintentionally overpaying the employee. The second circumstance is when the business misinterprets the applicable industrial instrument, for example, the applicable modern award or enterprise agreement. An overpayment may also occur when an employer allows and employee to take paid leave in advance of accrual and the employee’s employment terminates before the employee has accrued the leave.
The answer to the question is not necessarily straight forward and the employer’s approach will differ depending on the circumstances and if the employee is a current or former employee.
The Fair Work Act 2009 (Cth) (“FWA”) is restrictive in relation to when an employer may make deductions from an employee’s wages or salary. Specifically, section 324 if the FWA provides when an employer may deduct an amount payable to an employee. Deductions are only permitted if:
- The deduction is authorised in writing by the employee and is principally for the employee’s benefit (for example this would include salary sacrifice or making additional elective payments towards their superannuation); or
- The deduction is authorised in accordance with an enterprise agreement; or
- The deduction is authorised by or under a modern award or a Fair Work Commission order; or
- The deduction is authorised by or under a law of the Commonwealth, a State, or Territory or an order of a court.
Accordingly, in the absence of an express provision permitting deductions in the event of an overpayment, the FWA will does permit an employer to unilaterally deduct an amount from an employee’s pay if the deduction is not principally for the employee’s benefit and the employee does not authorise it in writing.
In addition, although it is common for contracts of employment to contain provisions which expressly allow an employer to make deductions, such terms may not comply with section 324 of the FWA. Furthermore, section 326 of the FWA provides that certain terms (including within a contract of employment) have no effect to the extent that the term permits, or has the effect of permitting, an employer to deduct an amount that is payable to an employee for work performed, if the deduction is:
- Directly or indirectly for the benefit of the employer or a party related to the employer; and
- Unreasonable in the circumstances.
How to lawfully recover the overpayment from a current employee
The recovery of an overpayment of wages by offsetting the amount against future salary or wages, subject to the authorisation by the employee, will be regarded as a reasonable deduction for the benefit of the employer, particularly if the overpayment was simply due to an error or mistake. However, any set-off must be reasonable. It would be extremely problematic if the set-off of the amount owing in effect meant the employee did not receive any payment for the specified period.
In order to recover the overpayment, we suggest informing the employee of the overpayment, the amount owed and the reason for how the overpayment arose. In addition, we suggest coming to an acceptable agreement with the employee where the repayment can be recouped over a mutually agreeable period of time. This agreement should be clearly articulated in writing and authorised by the employee.
If an employer is unable to enter into an agreement with the employee for repayment, and the employee does not authorise the repayment, the only legal method by which an employer can recover the overpayment is to make an application to the Court. We therefore recommend that an appropriate clause dealing with this matter be contained in the offer of employment or employment contract.
How to lawfully recover the overpayment from a former employee
If an employer has made an overpayment to a former employee, there is frequently a temptation to off-set the overpayment from any termination benefits owing to the employee. However, the legislative requirements as set out above apply equally to current and former employees, and a unilateral deduction without authorisation is not permitted. If the employer does not have the employee’s authorisation to set-off the overpayment, we suggest writing to the employee and informing them of the debt, how the overpayment occurred and requesting the employee pay the debt within a specified time period (such as 14 or 28 days). Depending on the circumstances, the business may agree to enter into a payment plan with the employee.
If the employee does not repay the debt within the specified time period or refuses to repay the debt, the employer will need to commence legal proceedings in order to recover the overpayment.
However, recovery of any overpayment, whether from a current or former employee, may not be possible where the employee has changed ‘position’ on the basis of the overpayment.
In the case of TRA Global v Vesna Kebakoska  VSC 480, Ms Kebakoska was employed by TRA Global and her position was subsequently made redundant. Upon termination of her employment, TRA Global paid Ms Kebakoska, among other things, a redundancy payment of 12 weeks’ pay amounting to $27,314.57. TRA Global believed this was the redundancy payment to which she was lawfully entitled.
Approximately a month after Ms Kebakoska’s termination of employment, she applied for unemployment benefits with Centrelink. Her application was refused based on the fact she had received the redundancy payment. Consequently, Ms Kebakoska spent the redundancy payment on living expenses while she was unemployed.
Later, Ms Kebakoska commenced proceedings against TRA Global for a contractual bonus which remained unpaid. TRA Global realised that they had overpaid Ms Kebakoska in relation to her redundancy payment and cross-claimed for restitution of the incorrect payment.
On appeal, the Victorian Supreme Court confirmed that where a party mistakenly believed they were legally obliged to make a payment, they usually have a right to sue to recover the payment. However, in this instance, it was found that Ms Kebakoska did not have to repay the redundancy payment because she had suffered a detriment in being denied unemployment benefits and she would not have suffered that detriment had she not relied on what TRA Global had told her, which was that she was entitled to the redundancy payment. While it is not generally a defence to argue that the money was spent on living expenses, in this case, as Ms Kebakoska ‘changed her position’ – i.e. being denied her entitlement to unemployment benefits by relying on the redundancy payment – the Court found that it would be unjust to require her to repay the overpayment. It was noted that had TRA Global realised the mistake sooner, for example before she applied for Centrelink, then they would have had a stronger chance in recovering the overpayment.
Accordingly, employers must be especially vigilant and cautious when it comes to the issue of overpayments and the how they may deduct amounts from an employee’s salary.
This week a media release announced that the Super Retail Group who owns Rebel Sport, Supercheap Auto, Rays Outdoors, BCF and Macpac had underpaid store managers by $32 million over the past six years by not applying overtime rates properly. The Super Retail Group stated that it would pay back approximately $32 million owed to managers plus about $11 million to cover interest and payroll tax.
The Super Retail Group stated that a recent review of its employment arrangements had uncovered the underpayments, which affect about 3000 current and former employees. The review was initially launched last year after the company had also discovered it had underpaid workers setting up new stores by $8 million as result of not applying penalty rates and other allowances to the overtime hours they worked.
Both instances are serious underpayments which will have enormous consequences for the company who are now working with the Fair Work Ombudsman to rectify the situation.
In addition, the Federal Government has this week introduced legislation that will amend the Fair Work Act 2009 (Cth) to insert into the National Employment Standards a new right for eligible casual employees to request to convert to full-time or part-time employment. This right is intended to ensure all employees in the national system will have access to the right to request casual conversion. This introduction follows the model casual conversion clause developed by the Fair Work Commission and inserted into modern awards effective from October 2018. The new legislation is set to capture employees who do not have access to a safety net right to request conversion where for example, they were not covered by a modern award.
Accordingly, we remind our clients and readers to conduct internal audits of their business affairs to ensure compliance with the FWA and any applicable industrial instruments such as modern awards and enterprise agreements. We are currently conducting a number of audits for clients to ensure they are meeting their legal obligations in this regard. In addition, we also remind our clients to ensure they are complying with their record keeping obligations in accordance with the FWA.
If any of our readers require further information in relation to any aspect of this alert or need specialist employment law advice in relation to whether they are paying employees correctly and complying with record keeping obligations or have a concern in relation to recovering an overpayment to an employee, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.