It is a not uncommon misapprehension to think that if an employee is overpaid wages by mistake he is entitled to keep the overpayment. In fact this is true only in unusual cases (for example, if the employee was genuinely and reasonably unaware that he had received more than his proper pay - see Lipkin Gorman v Karpnale Ltd HL, [1991] 2 AC 548, [1992] 4 All ER 512).

A separate question arises as to how the employer can recover the overpayment if the employee refuses to hand it back voluntarily. Can the employer legally reimburse himself by deducting the overpayment from future wages or must he sue? Basic law is that all unauthorised deductions from wages are illegal but there is an exception for deductions to reimburse an employer for overpayment of wages or expenses incurred in employment (Employment Rights Act 1996 s.13 Employment Rights Act 1996 s.14). Exactly what this meansl was considered in Home Office v Ayres which is:

Authority for the proposition that

in spite of its wide wording, Employment Rights Act 1996 s.14 allows an employer to reimburse himself out of an employee's wages for a previous overpayment of wages or expenses only if he is lawfully entitled to the amount in question.

editor's note:
The EAT has subsequently held that this case was WRONGLY DECIDED - see Sunderland Polytechnic v Evans 1993 ICR 392 and Scott v Strathclyde Fire Board, EAT on 26th April 2004.

For main relevant notes in this program see Deductions from wages etc/deductions from wages, salary or pay/general rule (exceptions) .