What is Back Pay?

Everyone expects to be paid fairly for the work they do. However, sometimes employees are paid less than what they deserve for their work. This could be due to various reasons, such as an accounting error, a change in classification, or an employer’s negligence.

Whatever the case may be, you are entitled to pay you’ve earned if your employer commits a wage violation. When you receive the wages you’re due for past work, it’s called back pay. In this article, we’ll take a closer look at the meaning of back pay and explain how back pay works. Read on to learn all about what back pay is or use the links below to go straight to a specific section.

What is Back Pay?

Back pay can be defined as the difference between the amount of pay a worker is owed versus what they actually received. Essentially, back pay is the term for wages that are owed to an employee for work done in the past. Yet, for whatever reason, the employer withheld these wages from the employee’s paycheque.

There are numerous reasons why an employee might be entitled to back wages. Common reasons back pay may be awarded include minimum wage violations, unpaid overtime, and accounting errors. Under current labour laws, employers are required to issue back pay to employees who have a valid complaint.

How Does Back Pay Work?

If an employer withholds your pay, whether intentionally or unintentionally, you may be entitled to back pay. This means that you will compel the employer to pay you the wages you’re owed. If you have a valid claim for back pay, the employer will have to pay you the wages you’re entitled to.

Wage violations and back pay issues mainly fall under provincial responsibilityEmployment and Social Development Canada is the governmental agency responsible for employees within federal jurisdiction.. Additionally, the Canada Labour Code (CLC) is a law designed to protect workers, and it’s enforced by the Ministry of Labour. Among other things, the CLC establishes the federal government’s minimum wage, overtime regulations, and recordkeeping standards for businesses.

If your employer is within federal jurisdiction and commits a wage violation and owes you back pay, you can take action to collect the money you’re owed. For starters, you can file an official complaint with the Ministry of Labour. If they deem your complaint valid, they can file a suit on your behalf to collect back pay. Alternatively, you can independently file a claim against your employer and take them to court for back pay, damages, court costs, and attorney fees.

Both small and large companies alike can be sued for back pay. Additionally, back pay doesn’t just apply to certain classifications of employees. Whether you’re an hourly worker, a salaried employee, a freelancer, or a contractor, you can be entitled to back pay.

Keep in mind that if you are owed back pay, it’s best to act relatively quickly. In general, the statute of limitations for claiming back pay is two years for unintentional violations and three years for intentional underpayment.

Reasons an Employer Might Owe Back Pay

There are many reasons an employer might owe back pay to a particular employee. In some cases, wage violations are an honest mistake sparked by a misclassification or accounting error. In other cases, employers may try to take advantage of their employees and cheat them out of wages through dishonest employment practices. In this section, we’ll go over some of the most common reasons an employer might owe back pay.

Minimum wage violations

All employers must abide by both federal and provincial minimum wage laws. If an employer fails to pay you the provincial minimum wage, you will likely be entitled to back pay.

Unpaid overtime

Eligible nonexempt employees are entitled to overtime wages once they exceed 40- 48 hours in a workweek, depending on the province. Overtime pay must be equal to or more than one and a half times their current pay rate. If an employer requires you to work overtime, they must meet these compensation standards. If they don’t, you may be entitled to back pay to compensate you for any overtime hours clocked.

Wrongful termination

If an employer violates an employment contract or law when firing an employee, the employee may sue for wrongful termination. If the lawsuit is successful, the wrongfully terminated employee may be entitled to wages for the time they would’ve spent working. Thus, back pay for wrongful employment usually stretches from the date an employee was terminated until the date the lawsuit is resolved.

Change in classification

A change in classification or a misclassification by an employer can result in back pay. For instance, if you switch from hourly to salary at your company, or vice versa, this can potentially spur retroactive pay. A pay increase can also be a reason for retroactive pay.

Accounting errors

Sometimes employees may receive back pay due to a simple accounting error. Perhaps a company’s accountant made a miscalculation or added up your hours incorrectly. Whether or not the mistake was intentional, the employer would still owe back pay in this case.

One easy way to avoid accounting errors when calculating employee pay is to use payroll software. With dedicated software, business owners can automatically pay their employees an accurate wage every pay period. This helps you stay in compliance with the Ministry of Labour and avoid committing any unintentional wage violations.

Are Employers Required to Pay Back Pay?

Yes, employers are required to issue back pay when they commit a wage violation. It doesn’t matter whether the violation was intentional or not—if an employee is owed money, the employer has to give them what they’re due. This means the employer must pay the employee the full amount owed in back pay.

An employer can face penalties if they don’t issue back pay once a ruling has been handed down. Penalties for failing to issue back pay vary according to provincial laws.

For example, in British Columbia, an employer can be faced with a penalty fine of $500 for an initial violation (for each failure to pay each employee), and $2,500 for subsequent violations.

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Are there any circumstances where an employer can withhold back pay?

There is a statute of limitations on back pay, meaning employees have a limited window of time to sue for these wages. Generally, for unintentional wage violations, employees can recover up to two years of back pay.

After the statute of limitations has expired on a particular wage violation, employees can no longer sue for that back pay. This means that, even if the employer did commit a wage violation, they wouldn’t be legally compelled to give the employee any back pay.

How Do Employers Issue Back Pay?

The process for awarding back pay to employees isn’t much different than the standard payroll process. If you’re asking, “What is payroll?” we simply mean the process of compensating employees.

Check out our blog to learn more about payroll deductions for your business.

To pay an employee retroactive wages or back pay, you can follow these steps:

  1. Either add the back pay amount to the employee’s next paycheque or create a separate one-time payroll.
  2. Deduct applicable taxes, as well as CPP and any health insurance premiums and the like, from back pay wages.
  3. Create accounting records for wages paid.

It’s also important to keep in mind that back pay is subject to the tax year in which it is paid. Don’t make the mistake of classifying these wages under the year when they should have been paid.

The process of issuing back pay is even easier when you use automated payroll software.

How to report back pay

There are several ways in which you can collect back pay. To get the back pay you’re owed, you can:

  • Bring the issue up with human resources at your company to try to resolve it internally.
  • Contact the Employment Standards Branch of your province or territory, which can assess your eligibility for back pay and supervise payment.
  • The Ministry of Labour can file a lawsuit on your behalf or obtain an injunction to prevent any employer from violating the CLC.
  • Contact an attorney and file a private lawsuit against your employer.
  • Litigate it yourself in Small Claims Court.

How is Back Pay Calculated?

Calculating back pay will look different depending on whether an employee is hourly or salaried. In any case, you’ll need to know how to calculate employee cheques before you calculate back pay.

How to calculate back pay for an hourly employee:

  1. Calculate number of hours worked: Add up the number of hours the employee is owed back pay for
  2. Multiply hours worked by hourly pay rate
  3. Adjust for overtime as needed

Back pay calculation example for hourly employees

Let’s say a company conducts layoffs due to the coronavirus pandemic, and an employee making $15 per hour is fired in June 2020. This employee believes the terms of their employment contract have been violated, and they file a lawsuit against their employer. The case drags on until January 2021, when a judge rules in favour of the employee and orders the employer to issue back pay. Thus, the employer would be responsible for the employee’s wages from June 2020 to January 2021.

Assuming the employee worked full time, we could calculate back pay as follows:

[$15 per hour] x [40 hours] x [4 weeks] = $2,400 per month

[$2,400 per month] x [8 months] = $19,200 in back pay

  1. So, the employer who wrongfully terminated the employee would owe them $19,200 in back pay for those eight months of missed wages.

How to calculate back pay for a salaried employee

If an employee is salaried, on the other hand, the process is a bit different. In this instance, let’s look at a

1. Determine number of pay periods they have in a year

2. Divide their salary by the number of pay periods to determine the amount they make each pay period.

3. Multiply this figure by the number of pay periods they’re owed back pay for.

[$50,000 salary] / 52 pay periods = $962 per pay period

[$962 per pay period] x [16 pay periods] = $15,392

The employer who wrongfully terminated the employee would owe them $15,392 in back pay for those 16 pay periods of missed wages.

  1. In both cases, you may have to factor in employee benefits as well. Benefits are part of compensation and thus must be incorporated into back pay.

Use Payroll Software to Avoid Pay Issues

If you’re a small business owner, you may operate on thin margins. Therefore, the last thing you want is to deal with an unexpected expense like back pay. On top of that, you don’t want to underpay your employees in the first place. Incorrectly calculated wages can make for tension and dissatisfaction among even your most trusted workers.

To avoid the problem of back pay, use QuickBooks Payroll. With our payroll software, you can automatically run payroll accurately every time. Plus, your team will love our same-day direct deposit, which allows them to quickly access their wages. Switching to an innovative payroll solution like QuickBooks Payroll will save you time, money, and effort.

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