Mistaken payments and employment

So you have just found out you have accidentally paid an employee $10,000 more than you should have—what can you do?

A recent matter gave the author cause to revisit the law of mistaken payments made to employees. It is a surprisingly common situation, and although regularly resolved simply through discussions; sometimes employers need recourse to formal recovery options. This article briefly discusses legal principles of mistaken payments in the context of employment.

Some common causes of overpayments to employees include:

• Miskeyed pay rate changes (such as accidentally adding an extra ‘0’)
• Failing to stop wages after an employee has ceased working
• Continuing to pay an employee’s full rate when on ACC, parental leave, or extended leave
• Double-paying expense reimbursements, or wages for submitted timesheets or overtime
• Holiday pay miscalculations
• Employee fraud, such as false invoicing or incurring personal expenses

If asking the employee to repay the funds does not get the right result, the first step an employer might consider is the ‘self-help’ remedy of deducting money payable from wages. Whether this option is appropriate is going to depend on a number of factors, including the quantum of the debt and whether the individual is still employed.

Wage deductions are subject to the Wages Protection Act 1983. In short, an employer should only make deductions from wages where there is a specific request by the employee, or where there is written consent (such as a deductions provision in an employment agreement). Deductions relying on a deductions provision still require the employer consult with the employee before making the deduction, and the employee may withdraw their consent by way of written notice.

Where there is more significant money involved (thousands, rather than hundreds) formal recovery action will be appropriate. The Employment Relations Authority has jurisdiction to investigate and determine employment relationship problems no matter how they are framed.[1] This includes having jurisdiction to order restitution (an equitable remedy) for unjust enrichment. Payments made under the influence of a mistake are recoverable in the Employment Relations Authority.[2]

In the past it had been viewed that in some circumstances either the employment jurisdiction or the courts of general jurisdiction (High Court, District Court) could be used to recover mistaken payments. The FMV v TZB judgment confirms where the payment arose in the context of an employment relationship, the Employment Relations Authority is the correct forum for seeking recovery.

The legal test for unjust enrichment (although noting the claim for recovery need not be specifically described as unjust enrichment, it is a common way of framing recovery of mistaken payments) is:

• firstly, proof of the recipient’s (employee’s) enrichment by receipt of a benefit;
• secondly, corresponding deprivation to the donor (employer); and
• thirdly, there must be no legal reason the employee should be allowed to keep the money.

Importantly because recovering mistaken payments is an equitable remedy; no party need be at fault and the cause of the mistake is generally going to be unimportant.

There is one commonly invoked defence to a claim for restitutionary recovery: that the recipient has changed their position in reliance on the payment. The legal elements of this defence are: the recipient’s expenditure must be exceptional or material; that expenditure must have been in reliance on the payment(s) received; and the recipient must have changed their position in good faith. The mere fact the recipient has spent the money (in whole or in part) does not make out the defence.

An example of the change of position defence being argued successfully in the employment context is Foai v Air New Zealand Ltd.[3] Air New Zealand mistakenly overpaid Mr Foai’s wages, and in turn Mr Foai lived beyond his real means (in reliance on the additional money) for a period of 16 months.

Sometimes an employer may have reason to get Police involved, such as where fraud is suspected. The issue there is a Police investigation is unlikely to lead to quickly recovering funds. If (and it is a big if) Police investigate and there is a resulting prosecution, an employer may be able to recover the funds as reparation within a criminal prosecution process. Much more likely, however, is that recovery is more efficient through other means.

Exactly what steps an employer takes and whether legal advice is necessary is going to depend on the individual circumstances of each matter. To ensure the best chance of recovery it is important to act early and to consider all options.

[1] FMV v TZB [2021] NZSC 102, at [58]

[2] New Zealand Fire Service Commission v Warner [2010] ERNZ 290, at 300

[3] [2012] ERNZ 229

Want to know more?

Please get in touch with our Employment Team if you have any other questions regarding mistaken payments and employment.

PDF version: here.

This article was included in Edition 14 of our employment newsletter – Employment News which you can read here.