Payroll Errors and Related Legalities

The main effect of Employment Rights Act 1996 Part II (s.13 to s.27) is to make it unlawful for an employer to make any deduction from the wages of a worker employed by him unless the worker has agreed in writing to the deduction being made or it is required by law.

Staff under-paid – what could be the consequences?

The general rule is that if an employer reduces or fails to pay wages without agreement in writing from the employee this is a breach of the ERA 1996 and amounts to an unlawful deduction from wages.

There are some exceptions to this rule in the form of deductions authorised by the ERA 1996. These are:

• deductions authorised by the worker's contract (ERA 1996 s.13(1)(a)).
• deductions authorised by the employee in advance of the event in respect of which they are made (ERA 1996 s.13(1)(b)).
• deductions authorised or required by law, such as PAYE or NIC's or under an attachment of earnings order ((ERA 1996 s.14(3)).
• deductions made "on account of the worker's having taken part" in a strike or other industrial action (ERA 1996 s.14(5)).
• deductions to reimburse the employer for overpayment of wages or expenses (ERA 1996 s.14(1)) (but see below).

Staff told they will be paid late – is this legal? Can an employer do this? What could the employee do?

For employers, the consequences of the above are that an Employment Tribunal can order an employer to pay to the employee any amount deducted from the employee's pay if the deduction was not one of those authorised by ERA 1996.

In the case of Elizabeth Claire Care Management Ltd v Francis EAT 2005 IRLR 858 the EAT held that non-payment on time of all the wages due to an employee is as much a "deduction from wages" as the non-payment of some wages.

If the failure to pay on time is due to a temporary technical fault or a simple accounting error or mistake or due to accident or illness etc, it would be open to the courts to hold that the breach did not go to the root of the contract although this may amount to a ‘deduction’ under ERA, s13.

Complaints about frequent late payment of wages are an assertion of a "relevant statutory right" and if an employee is dismissed for making those complaints that dismissal will be automatically unfair under ERA 1996 s.104.

An employee may give their written consent or agreement to a late payment. This must be provided before the payment of wages becomes late and consent or agreement will not be effective if provided after the correct time for payment has passed.

Staff overpaid- do they have to pay it back?

The general rule is that the employer can reclaim the overpayment and the employee must refund it. However, if an employer overpays an employee in error and the employee, genuinely not realising that there has been a mistake, innocently uses the overpayment to pay for things which he would not otherwise have bought and "changes his position" as a result, it is established that the employer will not be entitled to recover the overpayment by court action.

In general a relevant change of position is more likely to occur after receipt of the overpayment than before - for example, a person receives payment in good faith and then spends it, gives it away, or loses it. Nevertheless reversal of that normal order of events does not affect the availability of the defence so where an employer has overpaid an employee by mistake the Court's consideration of whether the employee should be relieved of the obligation to repay that money can take into account "anticipatory reliance" if the employee had changed his position in good faith in the expectation of receiving a future benefit see for example the case of Commerzbank AG v Gareth Price-Jones, [2003] EWCA Civ 1663, Court of Appeal, 21st November 2003.

A cautionary tale for employers

A lady named Natasha Keenan worked part time for the Woolwich Building Society and had been earning £9,500 per annum. A few years ago, the Woolwich business was taken over by Barclays. Ms Keenan transferred across and was told to expect a "significant" pay rise. She therefore did not question it when her new contract of employment stated she would be on £17,000. What the contract omitted to mention was that this was the full time rate and that as a part timer she would be paid pro rata. Barclays therefore began paying Ms Keenan this new rate of double her previous pay.

On realising its error, Barclays tried to recoup the overpaid money by making deductions from Ms Keenan's wages. She was not happy with this and sued. By the time the case came to the employment tribunal Barclays had agreed to let her keep the money they had overpaid but Ms Keenan wanted to continue to receive double pay for the future. Her contract stated £17,000 pa and that, she said, was therefore her contractual right. She had taken on ongoing commitments based on receiving the full salary and Barclays could not unilaterally vary her terms.

Barclays defended the case on the basis that the excess payments were all a mistake and that Mrs Keenan either knew or should have known that that was the case. The employment tribunal at Ashford, Kent has found in her favour, also ruling that Barclays must pay her interest at 8% on any amount due but still unpaid at 3rd July 2009.