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?
• How does back pay work?
• Reasons an employer might owe back pay
• Are employers required to pay back pay?
• How do employers issue back pay?
• How is back pay calculated?
• Use payroll software to avoid pay issues

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. Depending on where the business is located and local laws, employers may be required to issue back pay to employees who have valid complaints.

How does back pay work?

If an employer withholds your pay 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 to back pay, the employer will have to pay you the wages you’re entitled to once you’ve filed a claim. 

Wage violations and back pay issues are usually regulated by government institutions, with laws in place to protect the rights of workers. Both business owners and employees should be well versed in the labour laws governing their cities and countries. Business owners should ensure they’re not violating any labour laws, and employees should know their rights to ensure they are being treated justly and legally. 

If your employer commits a wage violation and owes you back pay, you may be able to take action to collect the money you’re owed. File an official complaint with the formal governing body in your country to see if you are entitled to any back pay and further damages. 

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. 

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 honest mistakes 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

In most countries, there are minimum wage laws. This minimum wage is the absolute lowest wage a business will need to pay an employee in their country of operation for a specified period of time. This period of time could be hourly, daily, or monthly. If an employer fails to pay you the minimum wage, you will likely be entitled to back pay. 

Unpaid overtime

Based on your country’s labour laws and your type of contract, you may be entitled to overtime pay. A very common calculation is that overtime pay must be equal to or more than one and a half times the employee’s current pay rate, although these rates may vary from country to country. 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 pay to salaried pay 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 payroll software, business owners can automatically pay their employees an accurate wage every pay period.

Are employers required to pay back pay?

Yes, employers are required to issue back pay when they commit a wage violation in most countries. 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 specific laws.

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

There may be cases where an employer can withhold back pay depending on each country's labour laws. Sometimes, there may be a statute of limitations on back pay, meaning employees have a limited window of time to sue for these wages. Each country has its own timeframe for these windows so it is important to be aware of them if you are thinking of requesting back pay from your employer. 

After the statute of limitations has expired on a particular wage violation, employees would no longer be able to 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 too different from the standard payroll process. If you’re asking, “What is payroll?” we simply mean the process of compensating employees.

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

• Either add the back pay amount to the employee’s next paycheque or create a separate one-time payroll.
• Deduct applicable taxes, as well as personal identification information, and the like, from back pay wages.
• 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 is back pay calculated?

Calculating back pay will look different depending on the employee contract arrangements (for example whether an employee is hourly or salaried). In any case, you’ll need to know how to calculate employee checks before you calculate back pay.

How to calculate back pay for an hourly employee:

1. Calculate the 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

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 the 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.

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 and accounting software to avoid payment 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 accounting problems, such as back pay, make sure you are aware of your local labour laws. You can also support your business by using accounting software like QuickBooks Online. This way, you can ensure all of your employees and payment information are found in one place, and you can minimise any errors or extra payments that may happen because of accounting mistakes. Switching to an innovative accounting solution like QuickBooks will save you time, money, and effort.