Overpayments can financially hurt both employees and employers and it is important for both parties that correct payment amounts have been calculated and paid. Ideally, they need to be identified and rectified in the same financial year they are made.
I don’t need to point out the obvious consequences of overpayments. If an employer mistakenly makes an overpayment or is regularly calculating higher rates or entitlements than necessary, they will need to recoup these payments or it will directly impact their wages costs and ultimately profitability.
However, there are additional consequences for both employers and employees other than what might be obvious. These relate to the timing of finding and recouping the overpayment.
If an overpayment is discovered in the same financial year that it was made, the employer can rectify the situation by recouping only the net portion of the overpayment. They should then make a tax adjustment the following pay period so the employee has the correct tax withheld. In effect, this works like a loan to the employee. First they are paid an additional net amount, which is paid back and tax adjusted in a subsequent payroll period. No further documentation or calculation is required.
However, if you discover a payment from a previous financial year it will cause significantly more work and potential cost for both the employer and the employee.
This is because the employer will lodge their end of year figures with the tax department showing that a certain amount of tax has been withheld from the employee who has been overpaid. So when it comes to recouping the funds, the gross (as opposed to net) amount needs to be collected. This makes the employee out of pocket by the amount of the tax adjustment. The employer will now need to reissue a revised payment summary, which includes the correct amount of PAYG that should have been paid. The employee will need to lodge an amended tax return with the tax office to have the overpaid tax refunded.
My experience is that the majority of overpayments are made because employers don’t correctly understand the entitlements of the awards they are using. Often they pay shift or overtime payments on a higher figure than necessary or pay allowances that employees are not entitled to when they are on sick or annual leave.
The only way to get total comfort that you are paying correctly is to have an independent payroll compliance audit completed. In the meantime, be careful to check that any overpayments that have been made in the current financial year are recouped by June 30. This way, you’ll save both yourself and your employee time and expense in the future.
Tracy Angwin is the founder and managing director of the Australian Payroll Association.
Tracy is the founder and chief executive officer at the Australian Payroll Association and the director of Payroll HQ.
