Every business wants to make sure they’re not spending money unnecessarily. An easy way to achieve this is to avoid overpayments in your organisation’s Payroll. Unfortunately, overpayments are going to happen at some point in most organisations, so when this does happen, you need to be prepared to minimise the costs involved and try to prevent it from happening again.
When companies aren’t familiar with the best ways to handle overpayments, it can lead to large costs, lengthy legal processes, and some serious Public Relations (PR) issues. Making sure that you’re prepared to handle overpayments when they occur can be incredibly helpful in making sure you don’t end up having the rug pulled out from under you.
Why do overpayments happen, and how do you find them?
Overpayments happen for the same reasons underpayments do, whether that’s incorrect interpretation of awards or, most often, sub-optimal business processes related to Payroll and Operations.
These problems are just as expected to lead to overpayments as they would underpayments. In addition to this, most employees aren’t as likely to question small overpayments on their payslip as they might challenge an underpayment, so it’s easy for it to go unnoticed during regular Payroll cycles.
There are a few ways to identify overpayments.
First and foremost, Payroll validation reports. It is critical for any business to be running validation reports or undertaking some form of Payroll checking.
Through Payroll system change. It is very common for payment issues to be noticed during a Payroll system change. When implementing a new system, it becomes easy to identify variances between the two systems in calculated pay for the same person working the same shifts.
Payroll Health Check – This is a service offering of AgileXperts that can help identify risks and issues in your organisations Payroll and Time & Attendance processes which then allow the identification of overpayments.
How should you react to overpayments?
Fair Work doesn’t require overpayment issues to be rectified in any particular way. Rather, employees and companies are expected to negotiate how repayments might be made and either party is to seek legal advice if they can’t come to an agreement.
If the issue ends up in a legal battle, unfortunately, like many employment-related matters, it’s a matter of legal precedence. There is no black and white case which covers all flavours of this type of dispute. It is important to realise that there is no blanket statement that overpayments must be repaid.
Since there is no iron-clad guarantee that overpayments must be repaid, it requires a Business Case to validate whether it is worth trying to claw back any overpayments. It is therefore important for companies to seriously consider how they will respond when an overpayment is identified.
There are many factors that should be considered when deciding the best action to take when you discover overpayments, including how much has been overpaid, over what period, and how many employees. In a nutshell, the decision comes down to figuring out what’s going to cost you the least once everything is factored in.
What are the costs associated with repayment?
There can be quite high costs associated with recouping overpayments, especially when large amounts have been overpaid to many employees. This can include the cost of legal advice and representation. Even if the issue doesn’t lead to a legal battle, there is still the cost seeking of legal advice before trying to negotiate repayments with the employee.
Along with this, there is the administration cost of organising how repayments will be made. Whether repayments will be made by cash, cheque, or electronic transfer, systems and processes will need to be put in place to organise and keep track of these payments. If repayments are only being made by a few employees over a short period of time, this can be quite simple, however if there are hundreds of employees that are going to be making repayments over the course of several years, this cost can become quite high.
Perhaps the easiest cost to miss in these issues is the PR cost. Requesting large sums of money back from a wide range of employees or even individuals has the potential to cause PR concerns for your company reputation and internal culture, and this cost needs to be considered as much as any other. This can obviously be minimised by effective and sensitive handling of the issue, but sometimes it’s easier to write off an overpayment than to deal with all the possible costs.
What next?
The best place to start is to seek immediate legal advice when you discover overpayments, so you’re aware of what courses of action that are reasonable from a legal standpoint. It’s then a matter of weighing up the costs associated with your different options, in order to decide what’s going to be best for your organisation.
I always recommend closely examining your Payroll systems and processes to try and identify the root cause of any overpayment. You can do this yourself, or get a third party, such as AgileXperts, in to do a Payroll process audit or health check. That way, you’ll hopefully be able to prevent this difficult situation from occurring again.
Improving or implementing new processes within your Payroll management team to keep an eye out for these issues in the future is also a good idea to help identify overpayments sooner rather than later. All in all, reacting to overpayments is just a question of minimising costs.
Businesses can email contact@agilexperts.com.au or call 1300 287 213 for free first-step advice on how to ensure your Payroll processes can safeguard your Payroll compliance. Follow us on LinkedIn or sign up here to receive our articles direct to your email inbox.