Can an employer recover wages that were overpaid to an employee ?

This issue was considered by the Employment Court in Foai v Air New Zealand (4 April 2012), which resulted in Mr Foai being allowed to keep the net sum of $42,635.40 that was overpaid to him.

In order to recover an overpayment the employer needs to show that the payment was made by mistake, duress, illegality or a similar ground.  In this case Air New Zealand sought to rely on ‘mistake’. To succeed on this ground they had to point to a specific mistake in making the payment.  However, the principal witnesses for Air New Zealand expressly denied any knowledge of a mistake. It was alleged that there had been a computer error, but no-one was able to give evidence of this. For this reason, the Court held that Air New Zealand had failed to establish that the overpayments were made as a result of a mistake.

The Court then considered an equitable point raised by Mr Foai – that he had altered his position in reliance on the payment. To be successful with this claim, there are two prerequisites:  that the employee was not a wrongdoer and that he did not act in bad faith.  In this case there was no suggestion that Mr Foai was a wrongdoer. In terms of good faith, this concept implies honesty, openness and absence of ulterior purpose or motivation (Carter Holt Harvey Ltd v National Distribution Union Inc). Here, Mr Foai had queried, from an early stage, how his pay was made up. As the payments increased he made additional enquires. Air New Zealand argued that because Mr Foai suspected a mistake and told his employers about it, he cannot have received the payments in good faith. However, the Court did not accept that he had acted dishonestly or in bad faith.  Rather, it held that he was entitled to assume that he was being paid the correct amount by his employer.

In terms of whether Mr Foai had changed his position in reliance on the payments such that it would be inequitable to require him to make restitution, it was noted that as a result of the increased income he had: changed his living situation, been on a number of overseas trips, paid for gifts and trips for others, bought an engagement ring, and incurred a child support debt to the IRD.  In effect, Mr Foai had lived beyond his means for around 16 months.

Mr Foai was also successful in terms of section 94B of the Judicature Act 1908, with the Court holding that the relative equities were overwhelmingly in his favour.  In particular, Mr Foai was entitled to have a reasonable expectation that Air New Zealand would not misrepresent the amount of pay to which he was entitled. Furthermore the injustice in compelling him to repay such a large amount would significantly outweigh the potential injustice to Air New Zealand if the company was denied recovery.