What can employers do when there is an overpayment? The answer varies depending on whether the overpayment concerns a current, departing or former employee.  

Current employee  

Generally, when there is an overpayment to a current employee the employer should write to the employee about the underpayment and seek an agreement to deduct wages from the employee’s salary. The communication to the employee should include:  

• the reasons for the overpayment (most commonly a payroll error) and the amount overpaid; and
• a request that the employee enter into an agreement with the employer specifying the amount to be repaid and the method and time frame for repayment.  

For example, the employer might state that there was an overpayment due to a payroll error in the sum of $9,000. The employer could make an assessment as to a reasonable amount to be repaid, which might be 75% of the overpayment amount. In the communication to the employee, the employer could request that the employee enter into an agreement to repay $6,750 (75% of the overpayment amount) and propose that $562 be deducted in equal monthly instalments for the next twelve months. 

However, employers must be mindful that wages can only be deducted from an employee’s salary if: 

• the deduction is authorised in writing by the employee and is principally for the employee’s benefit;
• the deduction is authorised by the employee in accordance with an enterprise agreement;
• 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.  

This means that an employer cannot deduct amounts from employees without express consent. If a deduction is made without an employee’s consent, it will be in breach of the Fair Work Act 2009 (Cth).  

If an employee refuses to repay the overpaid amounts, an employer can take a more adversarial approach and demand repayment with a view to commencing court proceedings for debt recovery. However, this approach introduces reputational risk for employers as current employees will likely view this negatively. It is often advisable to negotiate a part repayment of the overpaid amounts with current employees as set out in the example above. This is because it allows the employer to recoup some of its losses while maintaining good relationships with its current employees.  

Departing employees  

The circumstances in which an employee leaves an employer may dictate how an overpayment will be addressed. For example, if an employer wants to make an ex-gratia payment to an employee on separation, the ex-gratia payment could be offset with the overpaid amount. The employer could prepare a deed setting out this arrangement with the departing employee.  

A similar approach can be adopted where an employer has an ongoing dispute with an employee about matters unrelated to the overpayment. In those circumstances, the employer may reach an agreement with the employee about the disputed matters and the parties may enter a deed dealing both with the disputed matters and the overpaid amounts.  

Former employee  

Employers may decide to take a more adversarial approach to overpayments concerning former employees. However, an employer still needs to consider the risks of this approach because former employees may be in contact with current employees which can impact the confidence of the current workforce. The employer needs to weigh up the benefit received from pursuing the overpaid amounts against the risks to the company’s reputation and loss of morale among the current workforce.     

Takeaways for employers  

Employers need to prioritise company reputation when managing overpayments. While it may seem sensible to pursue the full amount overpaid, this needs to be weighed up against taking a more measured approach for long-term productivity benefits. While the approach to be taken will always be informed by the specific factual circumstances, employers may be better off requesting a compromised amount for repayment with a view to retaining employees and maintaining a positive workplace culture.