An investigation by Ofcom found that the broadband provider, which is owned by BT, broke a fundamental billing rule by continuing to charge a group of customers for landline or broadband after they had cancelled their service.
The company pocketed more than £500,000 before the breach came to light, Ofcom said. It added that Plusnet has now made “repeated attempts” to refund all affected ex-customers by letter and by phone.
It has since refunded 356 customers a total of £212,140, which included interest at a rate of four per cent for each customer.
Lindsey Fussell, consumer group director for Ofcom, said: “There can be no margin for error, and no excuses, when it comes to billing customers correctly.
“This fine should serve as a reminder to telecoms companies that they must adhere to Ofcom’s billing rules at all times, or face the consequences.”
Once a customer cancels his or her home phone or broadband service, providers’ billing systems must recognise that the line is ‘ceased’. An error in Plusnet’s system meant that cancelled lines were still recognised as “live”, Ofcom said.
As a result, 1,025 customers who had cancelled either their landline or broadband service continued to be billed, meaning they were overcharged by more than £500,000 in total.
Consumer groups welcomed the fine, saying that it sends a clear message to telecoms firms.
Richard Neudegg, head of regulation at uSwitch.com, said: “Ofcom’s decision to hand an £880,000 fine to Plusnet is yet another reminder to providers that the regulator will not tolerate billing mistakes. Customers need to have confidence that providers are getting it right.
“For those that have ended their contract they need to be reassured that no further money will be taken for a service they have ceased to used.
Plusnet has donated the remaining funds to a dozen local charities, in lieu of payments owed to customers whom it could not contact. The firm has also made clear to Ofcom the steps it has taken to prevent any future billing errors of this kind.
The fine - which incorporates a 20 per cent reduction to reflect Plusnet’s willingness to enter into a formal settlement, saving public money and resources - will be passed on to the Treasury.
Plusnet apologised to customers and said it was an “isolated historic issue”.
A spokeswoman for the internet service provider said: "We are very sorry and would like to apologise to the 1,025 customers affected. We reported this ourselves to Ofcom and made every effort to contact these customers to arrange a full refund before the investigation started.