I have been overpaid – what happens next? A Case Study
You noticed when checking your bank statement that a deposit of $2000 from your employer has unexpectedly appeared. Yay, you think — windfall!
The following week, your employer contacts you and advises that they have overpaid you and advise that you need to pay it back. They tell you: “we will deduct it from this fortnight’s salary. That’s ok with you isn’t it? Oh wait – you don’t have quite enough in your pay. We will take the difference out of your leave entitlements”.
STOP!
You might not expect this if it happens to you. Believe it or not, this type of action by employers is not an unusual occurrence – overpayments (and underpayments) do happen.
So what options and rights do you have?
It is important that you know what your options and rights are under the Fair Work Act.
Legally, you do not have to report an overpayment. However, the employer will have the right to recover the money if you refuse to repay the amount if/when they discover the overpayment to you.
Whilst most employers will seek repayment of overpayments, the employer can elect not to ask for repayment by the employee. 1
If the Employer requires the overpayment to be repaid, they cannot simply deduct money from an employee’s pay or entitlements to fix up their mistake of overpayment. Repayment requires a written agreement.
This written agreement may be subject to the terms in the person’s EA, Award, or if allowed by law, court order or by order of the Fair Work Commission. In any event, the employee must agree.2
The agreement should specify the reason for the overpayment, the amount of money overpaid and the way repayments will be made: i.e payment method, amount and how often. Those criteria must be reasonable. 2
If you feel that the repayment plan is unfair or unreasonable, you have the right to refuse to agree to it. It is illegal for your employer to just start making deductions from your pay without your consent.
The Fair Work page linked below has an example of a Reasonable Repayment Agreement.
You will also need to know when the overpayment was made. There are ATO implications if the overpayment was not discovered in the same financial year.
If the Employer discovers the overpayment in the same financial year and elects to recover the overpayment then the nett amount (after tax) needs to be repaid and the overpayment is not included in the employee’s income statement. The overpayment can be repaid in the same financial year or a subsequent financial year. 1
If the Employer discovers the overpayment in a subsequent financial year and elects to recover the overpayment then the gross amount (including tax withheld) needs to be repaid and the employer must issue the employee with an amended income statement. The gross amount is required to be repaid as the employer is not able to recover the tax withheld and paid to the ATO.1
However, if you cannot reach an agreement with your employer regarding a repayment plan, it is possible that your employer may initiate legal action against you.
Contact the IEU for advice or if you are unable to agree to a repayment plan – 8410 0122 or enquiries@ieusa.org.au
1 – https://www.ato.gov.au/Business/PAYG-withholding/In-detail/Repayment-of-overpaid-amounts/
2 – https://www.fairwork.gov.au/pay-and-wages/deducting-pay-and-overpayments
