Employment / Workplace

Employee Overpayment - An employer's guide of what not to do

The Employment Court has recently considered an employer's ability to reclaim money from an employee who had been substantially overpaid in error. In Foai v Air New Zealand, the Court overturned an earlier ruling of the Employment Relations Authority and declined Air New Zealand's attempt to recover $42,635.40 from Mr Foai. The decision may surprise many employers, and should serve as a warning that it is critical to ensure staff are paid correctly.

Background

Mr Foai was employed by Air New Zealand as a loader in a part time capacity for five years before he was offered a temporary contract as a Time and Attendant Administrator around June 2007. Despite it being a full time position, Mr Foai was still a part time employee in Air New Zealand's payroll system, which altered the manner in which his pay was calculated. Mr Foai was informed that he would now receive his "average earnings", which his manager explained would act as a "top-up" from his original hourly rate.

Over the course of the next 16 months, Mr Foai's pay was inconsistent and changed every pay period. A report compiled by Air New Zealand indicated that he was underpaid twice, but for the rest of the relevant period he was overpaid anywhere between $14 and up to over $3,000 from what his actual "average earnings" should have been.

Mr Foai raised questions regarding his pay with his manager, human resources and payroll administrators. He did not completely understand how his "average earnings" were being calculated, and was confused by the inconsistency in the amount he received. Initially his managers told him that he was being paid the correct amount. Mr Foai raised his concerns again several times, but despite periodic investigations, it was not until December 2008 that Air New Zealand finally realised their mistake and advised Mr Foai that he was being overpaid. By this stage the total overpayment amounted to over $40,000.

Air New Zealand terminated Mr Foai's employment in July 2009 for misconduct not related to the overpayment issue. Mr Foai challenged the dismissal in the Employment Relations Authority and, during the course of defending that action, Air New Zealand sought repayment of the $42,635.40 Mr Foai had been overpaid. The Authority ordered that Mr Faoi reimburse Air New Zealand in a separate decision, citing that the overpayments were a "recoverable debt". Mr Foai appealed the repayment order to the Employment Court, but did not pursue his unjustified dismissal claim. The Employment Court overturned the Authority's decision with respect to the repayment, and further ordered that Air New Zealand pay Mr Foai's costs.

Reasoning

Generally speaking it is an employer's obligation to make sure that they pay their employees the correct amount. Nevertheless, Air New Zealand claimed that they should be entitled to restitution as Mr Foai was overpaid by mistake. Restitution is an equitable concept, and the basic premise is that something should be returned, in this case money, because it was unfair for the other party to retain the benefit.

Mr Foai claimed that Air New Zealand should not be entitled to restitution, as he had altered his position in reliance that he had been paid the correct amount and it would therefore be inequitable to require restitution. Mr Foai's evidence showed that during the time he was employed as a T & A Administrator he had moved out of home, spent money on overseas trips and incurred a child support debt that was higher than it would otherwise have been as a result of his increased income.

The Court accepted that Mr Foai has altered his position because of the overpayment and rejected Air New Zealand's claim to restitution on other grounds as well. First and foremost Air New Zealand failed to establish that it was a mistake which caused the overpayments. The burden of proof to establish the payments were made in error rested on Air New Zealand, and they failed to provide sufficient evidence to do so.

Commentary

Although this decision may appear harsh from Air New Zealand's perspective, Mr Foai had followed up on several occasions to ensure that he was being paid the correct amount. Naturally, when an employee raises concerns about their wages, it is in an employer's best interest to investigate such concerns thoroughly and immediately. Air New Zealand's failure to do so in this case seems quite remarkable, given the size of the discrepancies in payments. If Air New Zealand had followed up on Mr Foai's initial inquiries, not only would the amount he was overpaid have been significantly limited, agreement is likely to have been reached with Mr Foai to return the money through deductions from his salary, in accordance with the Wages Protection Act 1983.

Air New Zealand has indicated that it intends to appeal the decision.

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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