IS overpayment calculation

Client fails to declare earnings, resulting in IS overpayment. For part of the period in question she was being overpaid by her employer (she had decreased her hours but they continued to pay at previous weekly rate). This didn’t come to light until much later and employer is now recovering this from her ongoing wages. IS overpayment calculation for this period is based on what she was actually paid rather than what she should have been paid had she been paid at the correct rate (if that makes sense).

My gut feeling is that this is correct, unfortunately, but I’d welcome a second opinion.

I don’t think it’s quite as straightforward as that, but it is a little tricky.

Reg. 35(1) of the IS regs defines earnings as “any remuneration or profit derived from that employment”.

“Derived from” means “having its origin in” but is a term widely used in tax law and does imply that the employee has some legal or contractual entitlement to the payments. In a case of overpayment of wages, the employee is not so entitled, albeit that they might be able to resist recovery in the courts (change of position and so on). The problem that this gives rise to has been resolved by different methods in the authorities;

1) In R(TC) 2/03 (a Family Credit case) it was held that the earnings of the claimant’s partner were that which remained after the sum deducted by the employer for a previous overpayment of wages.

2) In CCS 4378/2001 it was decided that the the whole of the salary before deductions counted as earnings and that the solution to the perceived injustice was the fact that the overpaid salary at the time that it was paid did not count as earnings “derived” from employment (presumably because there was no contractual entitlement to the payment).

The Commissioner in R(TC) 2/03 specifically declined to follow the reasoning in CCS 4378/2001 and did not see why the overpayment was not derived from employment at least for the period before the mistake was identified. For myself, I prefer CCS 4378/2001 because a) it sits better with the employer’s right to recover (if the employee was contractually entitled to the payments, why is the employer legally able to recover?) and b) in a case where the employer chose not to recover the claimant should not actually be any better off in benefit terms - the overpayment of wages would still count as the claimant’s income, but as income other than earnings.

The difficulty with both cases is that they were concerened with how a person’s present earnings should be assessed for benefit purposes (or for payments of child support in the case of CCS 4378/2001) rather than how earnings for a past period involving an overpayment of wages should be assessed, although CCS 4378/2001 does provide guidance for that circumstance.

I suppose that the approach that I would adopt is to ask whether;

a) the client is still having deductions from her earnings to recover the overpayment and whether she is currently in receipt of any means-tested benefit where the calculation of entitlement treats as earnings only that which remains after deductions for overpayment recovery have been made.

b) if the overpayment has now been recovered and deductions have ceased, whether the situation in a) above was one that applied whilst recovery was occurring.

If either of those is true, I think it will be far harder to argue that the earnings for the purposes of the IS overpayment should not include the overpaid wages - in effect, rather than being doubly penalised, the client would be receiving a double benefit from the overpayment (i.e. the overpayment of wages isn’t counted as earnings for the purposes of the IS overpayment and her earnings for current benefit entitlement don’t include those sums she is repaying, despite the fact she did receive - and presumably spend - the money).

Thanks, Past Caring. Will do a little more research. Very helpful.