Salary Overpayments and Employee Hardship: Legal Insights

One common issue that often arises after an employee's promotion, transfer, or departmental change is the revision of their salary. In some cases, employers pay more than the decided amount due to various reasons. This overpayment is usually a result of errors in calculating the pay or misinterpretations of rules and regulations. Such situations create complexities, especially when the overpayment is discovered after several years, leading to significant recovery amounts.

Causes of Salary Overpayment

Salary overpayments generally occur due to miscalculations by employers. In some instances, the employer may apply an incorrect principle for calculating pay or allowances, or they may misinterpret specific rules or orders that later turn out to be erroneous. These mistakes can go unnoticed for years, sometimes spanning three to four years or even longer.

During this period, the employee is usually under the impression that they are entitled to the revised payment. Importantly, the employee typically does not engage in any fraud or misrepresentation to receive this excess pay. The employer’s error is the sole reason for the overpayment. However, when the employer later realizes the mistake, they initiate recovery procedures, leading to substantial financial hardships for the employee.

The Legal Challenge of Recovery

When the employer decides to recover the overpaid amount, it often results in significant distress for the employee. Recovering large sums that have accumulated over several years places employees in a difficult position, financially and emotionally. It’s essential to understand that this recovery is not due to any wrongdoing on the employee's part but rather the employer's miscalculation.

Landmark Judgements

In such cases, two landmark judgments by the Hon'ble Supreme Court have provided relief to employees

1.??? Thomas Daniel vs. State of Kerala & Ors. (Civil Appeal No. 7115 of 2010)

https://www.livelaw.in/pdf_upload/438-thomas-daniel-v-state-of-kerala-supreme-court-of-india-2-may-2022-416481.pdf

"If the excess amount was not paid on account of any misrepresentation or fraud of the employee or if such excess payment was made by the employer by applying a wrong principle for calculating the pay/allowance or on the basis of a particular interpretation of rule/order which is subsequently found to be erroneous, such excess payment of emoluments or allowances are not recoverable. This relief against the recovery is granted not because of any right of the employees but in equity, exercising judicial discretion to provide relief to the employees from the hardship that will be caused if the recovery is ordered."

2.??? State of Punjab & Ors. vs. Rafiq Masih (SLP (C) No. 11684 of 2012)

https://main.sci.gov.in/judgment/judis/41794.pdf

"18. It is not possible to postulate all situations of hardship which would govern employees on the issue of recovery, where payments have mistakenly been made by the employer, in excess of their entitlement. Be that as it may, based on the decisions referred to hereinabove, we may, as a ready reference, summarise the following few situations, wherein recoveries by the employers, would be impermissible in law:

(i) Recovery from the employees belonging to Class III and Class IV service (or Group C and Group D service).

(ii) Recovery from the retired employees, or the employees who are due to retire within one year, of the order of recovery.

(iii) Recovery from the employees, when the excess payment has been made for a period in excess of five years, before the order of recovery is issued.

(iv) Recovery in cases where an employee has wrongfully been required to discharge duties of a higher post, and has been paid accordingly, even though he should have rightfully been required to work against an inferior post.

(v) In any other case, where the court arrives at the conclusion, that recovery if made from the employee, would be iniquitous or harsh or arbitrary to such an extent, as would far outweigh the equitable balance of the employer's right to recover.”