When an employment relationship ends, whether due to employee resignation, employer termination or redundancy, employers are legally required to provide employees with their final pay in a timely and accurate manner. However, mistakes in calculating final entitlements can occur, and one of the most common examples is overpaying an employee.
What is included in an employee’s final pay?
The components of an employee’s final payment are governed primarily by the Fair Work Act. Final payments can include:
- Unpaid ordinary wages up to the employee’s last day of work,
- accrued and unused annual leave paid out at base rate or with loading, depending on the Modern Award, Enterprise Agreement or employment contract,
- long service leave as governed by the Industrial Relations Act, if applicable,
- payment in lieu of notice, if there is agreement for the employee not to work their notice period,
- redundancy pay if applicable, and
- outstanding allowances or entitlements under any applicable Modern Award or Enterprise Agreement.
In some less common circumstances, final payments can also involve guaranteed bonuses if the terms of the bonus scheme are either not clearly set out, or they intentionally contain terms that do not require the employee to be an employee at the time the bonus payment is made.
Common causes of overpayment in an employee’s pay
Payroll errors can happen for several reasons, including:
- Miscalculating leave balances
- Overstating hours worked or entitlements
- Applying incorrect pay rates or awards
- Failing to deduct unpaid notice periods or overpayments of leave
- Duplicate payments or system input errors
Can an employer recover overpaid amounts in an employee’s final pay?
If an employer realises an overpayment occurred after the final payment has been processed, the employer cannot forcefully retrieve it. Instead, employers will need to:
- Identify the error, contact the employee promptly, explain the error and overpayment amount, and provide documentation.
- Request repayment in writing, ideally with flexible options for repayment (for example bank transfer or a payment plan).
- Keep all correspondence and proof of overpayment calculations.
As the matter can be sensitive, it is recommended that employers attempt to call employees as soon as possible once they realise an error has been made. This can help prevent issues with repayment, as employees often find it difficult to make repayments if the money has already been spent.
What happens if an employee refuses to repay overpayments after the end of their employment?
If the employee declines or ignores a request to repay overpaid wages, employers may consider legal action to recoup the payment, especially if the amount is significant.
Employer options include:
- Sending a formal letter of demand (possibly through a lawyer)
- Lodging a claim in the Queensland Civil and Administrative Tribunal (QCAT) for smaller claims (typically under $25,000)
- Filing a claim in Magistrates Court or higher if the amount exceeds the QCAT limit
Important note: Taking legal action can be costly and involve extensive time away from core business activities. It is recommended employers weigh the potential expense against the value of the overpayment.
Steps employers can take to avoid overpayment
To prevent and manage overpayments in termination pay:
- Conduct a review before processing the final pay: Ensure HR or payroll team members verify entitlement details carefully, especially when leave entitlements and notice periods are involved.
- Maintain accurate records: Keep up-to-date leave balances and employment records to avoid miscalculations.
- Seek advice: Consult an industrial organisation, such as Business Chamber Queensland, if the situation seems complex or could become contentious.
Overpaying an employee in their final payment is a correctable mistake, but it must be handled properly. While employers are within their rights to seek repayment, they must do so in a legal and proper manner, and they must weigh up the pros and cons of seeking such repayment.
Taking a professional, transparent approach not only protects employers from a legal perspective but also maintains goodwill, which can be especially important if businesses are within a small industry or tight-knit business community.
How can Business Chamber Queensland help?
If you need support in managing an overpayment matter, our Workplace Advisory team can help.
Our Workplace Advisory team provides insight, support and resources to guide you in making informed business decisions, helping you avoid issues around workforce management including overpayment or underpayment. Business Chamber Queensland Business Essentials and Business Evolve members can make unlimited calls to our Workplace Services Hotline for Human Resources support. Plus, all Business Chamber Queensland members can access Workplace Consulting Services at discounted rates.
