In this second instalment of a two-part guide HRM examines central maxims and exceptional scenarios related to overpayments.

The two central factors that shape the dynamic of overpayments are that the employer (in almost all cases) made a mistake, and that the employee might have already spent the money. 

The employer is entitled to the overpaid amount – they are even entitled to sue the employee if they refuse to return it – but they need to tread carefully. 

HRM spoke to Michael Byrnes, employment law expert and partner at Swaab, about overpayments, and covered the following topics (in this part of the guide we cover points five through seven, part one covers the previous topics).

1. Why overpayments occur
2. The law
3. How to engage an overpaid employee
4. Recovering the money
5. “Blood from a stone”: an employee’s personal situation
6. “Changed position”: when an employee can keep the money
7. Suing the employee: the last resort

5. “Blood from a stone”: an employee’s personal situation

As covered in previous sections, any return scheme has to be reasonable, especially if it involves a deduction in salary over a period of time. So what does “reasonable” mean when it comes to repayment?

 HRM asked Byrnes two extreme hypotheticals. Firstly, if you have an employee on the minimum wage (about $750 a week) could you ask for $350 to be returned each week?

 Byrnes says no, this would not be reasonable. 

“Their capacity to repay is extremely limited. What you would be looking at are very small amounts over an extended period of time.”

The next hypothetical was about someone on a much higher salary. If they were being paid $3,500 a week, since they could afford it, would it be reasonable to reclaim the money quickly, say at $1,000 a week?

 It’s possibly reasonable, says Byrnes, but not necessarily.

“It may well be that they are earning a comparatively good income, but they might also have firm financial commitments that are close to that income. Again, you need to show flexibility.”

This is why it’s so crucial to try and not make overpayments. They can be difficult to recover in both legal and practical terms, says Byrnes. For example, it’s quite possible the person has spent all of their money.

“If an employee can’t pay, the old ‘blood out of a stone’ maxim applies. Even if you can get it back, it can take quite a while. It will be small amounts of money over an extended period of time, much like a court order for garnishing a wage.”

6. “Changed position”: when an employee can keep the money

There is a particular circumstance where the employee is legally allowed to keep the overpayment. In the most famous case on the matter, Kebakosa v TRA Global, the Victorian Supreme Court found that Kebakoska had a legitimate “change of position” defence.

In a nutshell, Kebakoska was given an overly large redundancy payment. When she applied to Centrelink for income support she found the amount she’d been paid made her ineligible, so she lived off of what she had. 

When she took TRA Global to court to claim a separate contractual bonus, they noticed the overpayment and counterclaimed for the amount they were owed. This was denied. The court ruled it would be unjust to make her return the overpayment, because it directly caused her to miss out on money she otherwise would have received from Centrelink.

Now, this doesn’t mean that an overpaid employee can quickly spend the money and be free from having to pay it back, says Byrnes. A deciding factor for Kebakoska was that she told Centrelink about the redundancy payment and it refused her benefits because of it. The overpayment “changed her position”. If the company had noticed the overpayment before she went to Centrelink the outcome might have been different.

To better understand this defence, because it is determined on a case-by-case basis, imagine a scenario where an employee is accidentally given a bonus which is twice the amount they were owed and they spent the bonus on a more expensive car than they would have otherwise.

It is highly unlikely this person would win a case arguing “change of position”. The employee might say they wouldn’t have bought the car if they hadn’t been paid so much, but spending the money is not in and of itself sufficient (if it was, then everyone would have a change of position defence). The bonus didn’t make it necessary for them to buy a more expensive model over a cheaper one.

That being said, if the employee spent all of the bonus on a car and now they have no money left, the maxim of “getting blood out of a stone” does apply. You can’t make someone repay money they no longer have. 

Of course you can still reclaim the money, but you have to take into account their personal financial situation (new car and all) and come to a reasonable agreement on getting it paid back. It might feel like they should sell the car, but that’s not how the law views it.

“Mistakes can be made, and we shouldn’t be too critical about that. However when it’s the employer’s error – the employer’s problem – the employer can’t just then make it the employee’s problem,” says Byrnes. 

“It remains the employer’s problem and they need to work cooperatively with the employee in order to recover the amount that is legitimately owed.”

7. The last resort: suing the employee

If worse comes to worst and your employee simply refuses to agree to a reasonable repayment scheme, your options for recovering the money become very narrow and, potentially, catastrophic.

 “You might have to consider suing the employee to recover the debt,” says Byrnes.

“So you say, ‘We’ve overpaid this amount, it was paid by mistake, we assert a right to recover that amount.’ And you take legal action. Which is obviously from a cultural perspective far from ideal. It’s disastrous, really.”

It doesn’t take a vivid imagination to figure out what happens to workplace morale when you take a current employee to court. To prevent this it could be safer to reserve your rights to the amount owed. Generally (so not always) the law puts a time limit of six years when taking court action with regards to a debt. So if the employee leaves before then, you can sue once they are an ex-employee.

 “The goal should be to reach an agreement on the amount, even if it means it takes a lengthy period,” says Byrnes. “It may well be that the agreement has in it that the debt becomes due and payable on the employee’s departure. But employers really need to exercise a soft touch here.

“Ultimately the employer should not have made the mistake.”

 To recap:

• Be very rigorous with payroll to prevent an overpayment.
• If you do overpay, have processes in place that mean you notice it quickly (to prevent a “change of position” as happened to Kebakoska).
• To recover the overpayment, keep in mind the worst case scenarios and collaboratively engage the employee with a view to reaching a well-documented, reasonable agreement (see part one of the guide).

Understanding the legal landscape is crucial for all HR professionals. AHRI’s short course provides participants with an overview of the most important aspects of HR law.