Often, when the Fair Work Ombudsman is investigating a company, it has to do with incorrect payments and wrongful interpretation of awards.
Based on the work that the Australian Payroll Association does to remediate payroll, we often find that overpayments and underpayments by employers are about the same in Australia.
Overpayments can occur when an employer mistakenly believes an employee is entitled to the pay or because of a payroll error.
However, employers cannot take money out of an employee’s pay to fix up a mistake or overpayment. An agreement must be made with the employee about the method of repaying the overpayment.
Overpayments can be just as costly as underpayments to business owners – both financially and legally. It might be assumed that the effects of an overpayment are less than an underpayment, but this may not be the case, especially when overpayments have been happening for some time.
Clearly, there is an administrative cost to recouping an overpayment, but the biggest impact is often in communicating the overpayment and having to explain to the employee that their wages will decrease from what they are used to.
Our experience shows that although the employee has been overpaid, they get into a position of expecting that level of pay, so when the correction is made, the employee feels like they are now being underpaid, and the employer often has to deal with employee turnover, dissatisfaction and cultural issues that may come with that.
My tips for employers to correct an overpayment
1. If the overpayment occurred in a prior financial year
When the overpayment occurs in the prior financial year, the employer is required to give an amended payment summary to the employee. The payment summary should detail the amounts that the employee should have received in the relevant income year.
In this instance, don’t adjust the tax withheld on the amended payment summary. When the employee does their tax return, the ATO will realise that they have paid too much tax and refund them accordingly.
2. If overpayment occurred in the current financial year
If the overpayment was identified in the same financial year as it is paid, then the employee will only need to repay the net amount of the overpayment. The net amount is the extra amount that the employee received on top of what they were originally owed.
As an employer, you will need to adjust your PAYG amount to be remitted to the ATO accordingly. This overpaid amount must be repaid in the same financial year or in the subsequent financial year.
3. How to identify which method to use
The key identifier in the treatment of overpayments is whether the employee will be required to repay the overpayment and when the overpayment was identified.
The important thing to consider is the period in which the overpayment occurred relative to the period in which the overpayment is identified.
4. The method to use if the overpayment has occurred in the same financial year
If the overpayment is identified in the same financial year, then only the net pay needs to be recouped from the employee, as you don’t have to adjust your PAYG withheld payments with the ATO until you release your annual report.
The employee will not require an amended payment summary as the overpayment has been corrected in the same financial year and this information has not yet been sent and processed by the ATO.
5. The method to use if the overpayment occurs after the end of the financial year
If payment summaries have been issued and the PAYG has been sent to the ATO, as an employer you need to recoup the gross from the employee.
The employee then recoups the PAYG from the Tax Office via their tax return. They will be issued with an amended payment summary, which shows a lower gross but no change to the tax, so that your employee will receive a refund accordingly.
6. Employ an external payroll management provider
Employers and business owners can avoid making such errors by employing external payroll experts to create and implement a payroll system.
Having a third-party established provider that will manage all payroll-related issues can help streamline processes in companies and allow for less errors to occur in the long term.
Tracy Angwin is CEO and founder of the Australian Payroll Association.