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employment

Overpayment: Does an employee have to pay it back?

Key Takeaway

Employees generally have an obligation to repay overpaid wages. While the payment itself might be a mistake, employers are restricted in how they can recover the money, usually requiring employee consent or a court/tribunal order for deductions from future wages. Both parties must act in good faith when resolving overpayment issues.

Overpayment of Wages: Employee Obligations in New Zealand

When an employee receives an overpayment of wages in New Zealand, a general legal obligation arises for the employee to repay the excess amount. This obligation stems from the common law principle that a person should not be unjustly enriched by receiving money they are not entitled to. However, the method by which an employer can recover this overpayment is subject to specific legal restrictions, primarily under the Wages Protection Act 1983.

General Obligation to Repay

An employee generally has an obligation to repay any overpayment of wages they have received. This is based on the legal principle that money paid by mistake can typically be recovered. This obligation exists regardless of whether the overpayment was due to an employer error, a miscalculation, or any other reason, provided the employee was not entitled to that amount [Source: Common Law Principle of Unjust Enrichment].

How Overpayments Occur

Overpayments can occur for various reasons, including:

  • Payroll errors or administrative mistakes.
  • Incorrect calculation of leave entitlements, such as annual leave or sick leave.
  • Mistakes in termination payments, for example, paying out too much notice or redundancy.
  • Incorrect application of an award or employment agreement terms.

Employer's Right to Recovery

An employer has a right to recover overpaid wages. This right can be explicitly stated in the employment agreement, or it can arise from the common law principles mentioned above. Even if the employment agreement does not specifically mention overpayments, the general right to recover money paid by mistake applies [Source: Common Law Principle of Restitution].

Restrictions on Wage Deductions

Crucially, while an employer has a right to recover an overpayment, there are strict rules about how they can do this, especially concerning deductions from an employee's future wages. The Wages Protection Act 1983 prohibits an employer from making deductions from an employee's wages unless one of the following conditions is met:

  • The deduction is authorised by an Act of Parliament [Source: Wages Protection Act 1983, s 4(1)(a)].
  • The deduction is authorised by the employee in writing [Source: Wages Protection Act 1983, s 4(1)(b)].
  • The deduction is authorised by an order of the Employment Relations Authority (ERA) or a court [Source: Wages Protection Act 1983, s 4(1)(c)].

The Employment Relations Authority (ERA) is a specialist tribunal that investigates and resolves employment relationship problems in New Zealand [Source: Employment Relations Act 2000, s 103].

This means an employer cannot unilaterally deduct an overpayment from an employee's wages without their express written consent or a legal order. If an employer makes such a deduction without consent or authority, they may be in breach of the Wages Protection Act 1983.

For money advanced to an employee, which an overpayment can sometimes be considered, an employer can recover it as a debt. However, any recovery via deductions is still subject to the requirements of the Wages Protection Act 1983 [Source: Wages Protection Act 1983, s 5].

The Repayment Process

When an overpayment is identified, the employer should typically:

  1. Notify the employee: Inform the employee of the overpayment promptly.
  2. Provide details: Explain how the overpayment occurred, the period it covers, and the exact amount owed.
  3. Discuss repayment options: Propose a repayment plan. This could involve a lump sum, instalments, or a deduction from future wages, but any deduction from wages requires the employee's written consent [Source: Wages Protection Act 1983, s 4(1)(b)].

Both parties are expected to engage in this process in good faith, which means acting openly, honestly, and responsively [Source: Employment Relations Act 2000, s 4].

Resolving Disputes

If an employee disputes the overpayment, its amount, or the proposed repayment terms, they can raise an employment relationship problem. Such problems can be resolved through:

  • Discussion and negotiation directly between the employer and employee.
  • Mediation services provided by the Ministry of Business, Innovation and Employment (MBIE) [Source: Employment Relations Act 2000, s 144].
  • Referral to the Employment Relations Authority (ERA) if mediation is unsuccessful or inappropriate [Source: Employment Relations Act 2000, s 104]. The ERA can issue a determination on whether an overpayment occurred, the amount, and how it should be repaid.

Time Limits for Recovery

There is no specific statutory limitation period for an employer to notify an employee of an overpayment. However, general legal principles regarding the recovery of debts apply. An employer seeking to recover an overpayment through the Employment Relations Authority or the courts would generally be subject to the limitation period of 6 years from the date the cause of action accrued (i.e., when the overpayment was made or discovered) for a contractual claim [Source: Limitation Act 2010, s 11(1)(a)]. Delays in addressing overpayments can make recovery more difficult.

Good Faith Obligations

The Employment Relations Act 2000 imposes an obligation of good faith on both employers and employees in all aspects of their employment relationship [Source: Employment Relations Act 2000, s 4]. When dealing with an overpayment, this means both parties should:

  • Be responsive and communicative.
  • Act honestly and transparently.
  • Not mislead or deceive each other.
  • Be proactive and co-operative in resolving the issue.

This obligation applies to the employer in identifying the overpayment and discussing repayment, and to the employee in acknowledging and addressing the issue.

When to Seek Independent Legal Advice

For employers dealing with overpayments, or employees who have been informed of an overpayment, it is advisable to seek independent legal advice. This is particularly important if there is a dispute over the amount, the validity of the overpayment claim, or the proposed repayment method. Community Law Centres offer free legal advice and can provide guidance on specific situations. WorkSafe New Zealand also provides information on employment standards.

Key Resources