Overpayments can happen when mistakenly an employer believes that a worker is empowered to that amount of salary. It can also occur because of an error in the payroll. The ATO (Australian Taxation Office) advises that an employer needs to understand and decide how to claim back the overpayments correctly, to prevent misunderstandings, and avoid any legal fallout.
If by mistake, the organization has overpaid a worker, then the organization has the power to reclaim that amount back. But, the workers are guarded, under the Employment Rights Act 1996 of section 13. This act guards the workers against any illegal deductions from their salaries. Section 14 is an exception to this act as it provides for the occurrence of an overpayment, enabling employers to deduct the overpaid amount and correct the mistake. Furthermore, a specific provision in a lot of employment contracts permits for the corrections of payroll errors.
How to Recover the Overpayment
To correct the overpayment, the employer can deduct the amount from the worker’s salary. This deduction can be made in one go or installments. However, organizations should give notice to the workers and seek approval in advance of deductions. If the overpayment is of a significant amount, spreading the return over some time will assist to avoid conflicts. However, an agreement should be executed in writing and signed for the recovery of the overpayment. Then harmonized modifications can be performed in payroll.
Here are some tips for employers to correct the overpayment.
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- Whether the Employee is Legally Obliged to Pay Back the Amount: Legally, the worker does not need to pay back the extra amount except if this has been written in the contract. If the worker has left the organization, then they are not bound to pay back for overpayments to the employee.
- Written Agreement to Recover the Overpayment Amount: Before correcting the overpayment, a written agreement is required that is signed by both the employer and worker. In this agreement, the methods of repayment should be clearly outlined. Also, the total amount that requires to be deducted, and the frequency of the occurrence should be mentioned in the agreement. After the agreement is made, if a worker does not cooperate for the repayment, the organization can employ debt collectors or take legal action.
- Method of Correcting Overpayments: If the overpayment of salary was done in the same financial year, then the worker only has to return the actual amount of the overpayment. Accordingly, the employer has to adjust the PAYG amount that needs to be sent to the ATO. This overpaid money must be refunded in the same fiscal year or the subsequent fiscal year.
- Employ an Outside Payroll Management Provisioner to Reduce Overpayment Occurrences: Business owners and employers can prevent these errors of overpayment from happening in the first place by hiring external payroll specialists to organize and execute a payroll system. Employing third-party providers to handle all payroll-related problems can help to streamline processes in the organizations. Also, this will ensure a reduction in mistakes.
Conclusion
If an overpayment of payroll is discovered, the organization should discuss it with the worker and try to convince the worker to repay the amount over a period of time. In certain cases, the worker agrees to repay the amount in parts or all at once of the overpayment rather than getting involved in legal procedures to recover the amount. However, every case should be analyzed on its facts.
For more detailed information on the overpayment of payroll, join the Compliance Prime webinar.
