Occasionally, payroll errors can happen; whether it's an overpayment, underpayment, or a missed adjustment.

If an Employee Has Been Underpaid:

Correct the error as soon as possible, ideally in the next payroll or via a manual payment if urgent.

Inform the employee clearly of the mistake, how much is owed, and when it will be paid.

If an Employee Has Been Overpaid:

Even if it’s an honest admin error, you cannot automatically deduct the overpaid amount from their future wages without informing them.

Always Inform the Employee First

Under the Employment Rights Act 1996, you must get the employee’s knowledge and agreement before making any deductions from their pay (unless it’s for statutory deductions like tax or student loans).

Best Practice:

Notify the employee in writing of the overpayment.

Explain clearly:

What the error was

How much was overpaid

Proposed repayment options (e.g. over 2–3 months)

Obtain agreement from the employee in writing before any deduction is made.

This ensures transparency, maintains trust, and keeps us compliant with employment law.

What Is a Pay Reference Period (PRP)?

A Pay Reference Period is simply the time period that an employee's pay covers. It is used for calculating things like:

Minimum wage compliance

Deductions

Holiday pay

The PRP usually matches how often the employee is paid.

For example, if an employee is paid monthly on the 25th, their PRP would be from the 26th of the previous month to the 25th of the current month.

It’s important to know this when reviewing pay errors or calculating holiday entitlement, particularly for casual staff or variable hours.