Is it payback time for HP?

Last month, HP's Unix division overpaid its direct sales force their end-of-year bonuses and was said to be threatening to stop basic pay until the payments had been recovered. What rights do employees and employers have over payments made in error?

Staff overpaid by their employer as a result of a mistake of fact - such as the way bonuses are calculated - may be required by common law to repay the additional amount they have received. Keeping an overpayment in the knowledge that the employer has made a mistake could even amount to theft. Generally, only payments made under a mistake of law cannot be recovered.

When Hewlett Packard realised its error, it was said to be seeking reimbursement of up to #20,000 from individual employees. According to one source, the vendor threatened that any refusal would result in a stop on basic pay.

Overpaid staff do have some protection. If the manner in which the payment was made led them to believe they were entitled to the money and, as a result, they changed their position - buying a new car or taking on fresh obligations, for instance - they may be able to resist claims for reimbursement.

If the overpayment was caused primarily by the employees - if they spent the money in full knowledge of the error, for instance - the courts might take a different approach. In one case, an employee on sick leave for three years was overpaid in respect of his salary and sickness benefit. The court ruled that he had been led to believe he could treat the money as his own.

HP appears to have notified the direct sales force quickly once the mistake was discovered. However, some of them could already have spent some of the money.

For employers, protection comes in the form of the Wages Act, now part of the Employment Rights Act 1996. Under the legislation, employers cannot make deductions from wages unless their contracts allow it or the employees have agreed to the deduction in writing. The argument must be made before the event causing the deduction. It would be no use for HP to try to obtain written agreement from its employees after the overpayments were made - that would still be an unlawful deduction.

Wages, in this context, include bonuses or commission, so HP's bonuses would appear to fall squarely within the legislation.

If that were the end of the story and HP made the threatened deductions from basic pay, staff could take action to recover the deductions. Claims for an unlawful deduction from wages under the Employment Rights Act 1996 have to be brought before an employment tribunal, usually within three months of the deduction. There is no limit to the amount of money that can be recovered.

Plainly, such an outcome would be unjust to employers. Mistakes do happen and not all employers have properly drafted contracts containing the express right to make the deductions necessary to recover overpayments.

This, fortunately for employers, is recognised in the legislation. Where the purpose is reimbursement of an overpayment of wages or expenses, recovery by deduction is permitted, whether or not the employee has agreed to it contractually or otherwise. It is irrelevant whether or not the employee has spent the money, taken on obligations or otherwise changed position.

So, HP's threat to withhold basic pay until the overpaid bonuses are recovered is permitted.

Even if employers act lawfully in such situations, they face a legal minefield. In particular, all employment relationships carry an implied duty and obligation of mutual trust and confidence. A breach of the obligation could result in employees walking out, assuming they were constructively dismissed. Compensation claims for breach of contract, and for unfair dismissal basic and compensatory awards (currently capped at #12,000 but likely to increase to #40,000 or #50,000) can be made. In extreme cases, a whole workforce could disappear almost overnight.

It could be argued convincingly that any attempt by HP to stop basic pay until the overpayments have been recovered in full could be a breach of this implied obligation. That is, in circumstances where staff have in good faith changed their positions or taken on new obligations after receiving the overpayment - but probably not if they simply have the money sitting on deposit in a building society when they heard about the mistake.

Tailoring a recovery programme to avoid hardship to staff is important. So under these circumstances, employers should take steps to establish whether a simple deduction from salary would cause difficulties. The negotiations HP is reportedly having with its direct sales force should help it avoid constructive dismissal arguments and the consequent financial liability and disruption to its business.

So, if employers approach the subject sensibly, to try to avoid hardship to staff, the law will support them. And it will certainly help if their contracts of employment expressly allow for deductions of overpayments from salary.