So, your employer has overpaid you and you are unsure of what to do next. It is important to know your rights and obligations in this situation so that you understand what needs to be repaid and how it can be done. If you are an employer, seeking to reclaim your money, you can find more information about correcting overpayment here.
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Obligation to report
You find that you were paid more than you should have, do you have to report it? The answer is no. There is no legal obligation for you to report the overpayment. However, if your employer has noticed it, they will generally provide you with a formal notification. This can take the form of an email, letter etc.
Keeping the Money
Under the Fair Work Act 2009 (Cth), an employee is not legally obligated to return the overpaid amount. However, there are exceptions to this, and if you are unsure, it is best to consult a lawyer. Your employer may seek a court order to recover the money if you do not agree to return the overpaid amount. Nevertheless, even if you do not agree to return the money, your employment can not be terminated by your employer.
Repayment method
Employers can not deduct the employee’s future pay as a means to recover the overpayment. However, there may be exceptions to this where your employment agreement or enterprise agreement has stated that overpayments will be resolved through pay deduction.
The employer will typically suggest that you repay the overpayment in instalments or as a lump sum. Once you have agreed to repay the amount, a written agreement with the following terms should be drafted:
- Reason for overpayment
- Amount overpaid
- Method of repayment (e.g. cash)
- Frequency of repayment (if agreed to repay in instalments)
For further information regarding overpayment and deductions of pay, check out the Fair Work Ombudsman website.
Repayment amount
Once you have agreed to repay the overpayment, you must determine the repayment amount. The repayment amount is not necessarily the overpaid amount.
Repayment in the same financial year
If you and your employer become aware of the overpayment within the same financial year, then you are only required to repay the net pay. The net pay is the amount that you have actually received which does not include any withheld amounts for tax. Additionally, the employee can decide to pay it in the same or next financial year.
Example: Jim is an employee who was supposed to receive $200 from his employer. Instead, his employer paid him $1000, with $100 withheld for tax. This means that he only actually received $900. Jim only has to repay his employer $700 ($1000 minus $200 minus $100 tax = $700 repayment).
Repayment in the following financial year
If the overpayment is noticed in the following financial year, then you are required to repay the gross pay. The gross pay is the total amount that the employer has paid you, including withheld tax. If this repayment, has affected your income tax amount for any of the previous 2 years, then you should look into requesting an income tax return.
Example: Pamela is an employee who was supposed to receive $200 from her employer. Instead, her employer paid her $1000, with $100 withheld for tax. Pamela has to repay her employer $800 ($1000 minus $200 minus = $800 repayment).
For further information regarding overpayment in the same or following financial year, check out the Australian Tax Office’s website.
Summary
Ultimately, there is no legal obligation to return the overpayment nor report the overpayment. If you do agree to return the money, employers will typically allow you to choose whether you repay in instalments or all at once. However, there are many exceptions to this and it is best if you can seek legal advice for your specific situation. You can find a lawyer here who can look over your employment background and give you precise and tailored advice for your overpayment case.
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