Overpaid an employee? Here’s how to correct the error and ensure it doesn’t happen again

This month, jewellery chain Michael Hill was found to be underpaying its staff by up to $25 million. Often, when we hear news stories like this one, we are led to believe underpayments are more prevalent than overpayments — however, this is not always the case. 

Throughout my career, I’ve found overpayments are just as common as underpayments in Australia. 

Overpayments can occur when an employer mistakenly believes an employee is entitled to that salary or because of a payroll error. The ATO advises an employer needs to decide if the payee is required to repay the overpaid amount. If the employee is not obliged to repay the overpaid amount then, as an employer, you don’t need to anything unless you are part of an Australian federal or state government department or agency. 

What employers might not know is employees have no legal obligation to pay back an overpayment under the Fair Work Act. If an employer were to try and sack an employee for not agreeing to an overpayment correction, they can be sued for wrongful termination. However, an employer may discuss a repayment arrangement with the employee.

Here are my five tips for employers looking to correct an overpayment.

1. Find out if your employee is legally required to pay back the money. The employee is not legally required to pay back the extra money unless this has been outlined in their contract or industry award. Generally, if the employee has left the company, they aren’t obligated to pay an employer back for overpayments made in the past. 

2. Create a written agreement on how to recoup the overpayment amount. Before an overpayment can be corrected, there needs to be a written agreement that is signed by both the employee and employer. This agreement needs to clearly outline the method of re-payment (bank transfer or cheque), the frequency of how often it will occur (weekly or monthly) and the total amount that needs to be paid. Once this is clearly outlined, if an employee does not cooperate with a repayment request, the employer can take legal action or employ debt collectors.

3. Consider if you need to amend the payment summary given to an employee. When an overpayment occurs in the previous financial year, the employer is required to give an amended payment summary to the employee. The payment summary should detail the amounts the employee should have received in the relevant income year. In this instance, you won’t need to adjust the tax withheld on the amended payment summary. When the employee does their tax return, the ATO will realise they have paid too much tax and refund them accordingly. 

4. Understand the method of correcting overpayments, based on when it occurred. If the overpayment was identified in the same financial year it was paid, then the employee will only need to repay the net amount of the overpayment. The net amount is the extra amount the employee received on top of what they were originally owed. As an employer, you will need to adjust your PAYG amount to be remitted to the ATO accordingly. This overpaid amount must be repaid in the same financial year or in the subsequent financial year. 

5. Employ an external payroll management provider to minimise overpayment incidents. Employers and business owners can prevent these errors from occurring in the first place by employing external payroll experts to create and implement a payroll system. Using third-party providers to manage all payroll-related issues can help streamline processes in companies and ensures there are fewer mistakes made in the long term. 

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