What is back pay? Meaning, examples, and limitations

As a small business owner, the last thing you want to hear is that a valued employee hasn't received fair pay. Whether due to accounting errors or an unpaid bonus, when an employer owes wages to an unpaid employee, it's called back pay.

According to the QuickBooks Entrepreneurship in 2025 report, employees clock an average of 37 hours a week—so you want to be sure their pay reflects that. In addition to frustrating employees, back pay can land employers in hot water if they don't take care of it correctly.

So how exactly does back pay work, how is it recovered, and how is it paid for? Follow this comprehensive guide to learn everything you need to know about back pay.

How does back pay work?

Wage violations and back pay issues fall under the US Department of Labor (DOL)'s jurisdiction. The DOL is the governmental agency responsible for ensuring employers treat employees fairly. 

The Fair Labor Standards Act (FLSA) is a law designed to protect workers, and the DOL enforces it. Among other things, the FLSA establishes the federal government’s minimum wage, overtime laws, and business recordkeeping standards.

Some common examples of back pay include:

• An employee does receive their new salary while an employer processes a promotion 
• Unpaid over time
• A payroll mistake
• An employer intentionally underpays an employee

If an employer can't repay the total back pay, they must negotiate a payment plan to return wages as soon as possible. There may be legal action to enforce a payment plan if the employer fails to repay the worker.

How can employees get their back pay?

Employees can sue small and large companies alike for back pay. If an employer doesn’t fix the payment error after discovering it, they may be in violation of the FLSA, which means the employee can take action to recover their owed wages.

There are several ways an employee can collect back pay, including:

• Bringing the issue up with human resources at the company to try to resolve it.
• Contacting the Wage and Hour Division of the DOL, which can assess the employee's eligibility for back pay and supervise payment.
• The Secretary of Labor can file a lawsuit on the employee's behalf or obtain an injunction to prevent any employer from violating the FLSA.
• Contacting an attorney and filing a private lawsuit against the employer.

Back pay eligibility

Generally, any worker owed wages within the statute of limitations is eligible to receive back pay. Certain back pay situations, such as Social Security back pay, may have different requirements.

The typical back pay eligibility guidelines for workers include:

• An employer doesn't pay a worker their full wages.
• An employee doesn't receive benefits from the onset date of eligibility to claim approval.
• Tips, salary, benefits, overtime, and bonuses owed are all eligible for back pay.
• An employer must pay wages owed, regardless of their financial situation. They must negotiate a payment plan if they can't afford it outright.

If an employee is owed back pay, they should thoroughly document the situation, including all relevant communication, pay stubs, and any documentation that demonstrates they didn't receive what they're owed.

Reasons an employer might owe back pay

An employer might owe back pay to an employee for many reasons, such as back pay for a late raise. In some cases, wage violations are honest mistakes resulting from a misclassification or accounting error. In other cases, employers may try to exploit their employees through dishonest employment practices, such as ignoring state minimum wage laws.

Common reasons for back pay include:

• Minimum wage violations
• Unpaid overtime
• Wrongful termination
• Unpaid bonuses or commissions
• Tip or wage theft
• Worker misclassification
• Accounting errors
• Payroll fraud

Consider using accounting software to help reduce the risk of back pay due to accounting errors. 

How to calculate back pay

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

To calculate back pay for an hourly employee, you’ll:

• Add up the number of hours the employee is owed back pay for.
• Multiply their hours worked by their hourly pay rate.
• Adjust for overtime as needed.

To calculate back pay for a salaried employee, you’ll:

• Determine the number of pay periods they have in a year.
• Divide their salary by the number of pay periods to determine the amount they make each pay period.
• Multiply this figure by the number of pay periods they’re owed back pay for.

How is back pay recovered?

If you owe an employee back pay, you should repay them immediately to avoid violating the FSLA. You can visit the DOL’s Workers Owed Wages website and search through a vast database to find out if you owe your workers back pay. 

In case of an honest mistake, you can resolve any back pay issues internally. If you don't, the DOL may get involved to enforce repayment.

How do employers issue back pay?

Awarding back pay to employees isn’t much different from the standard payroll process. You can typically give an employee their back pay on top of their normal paycheck.

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

• Add the back pay amount to the employee’s next paycheck or create a separate one-time payroll.
• Deduct applicable taxes, Social Security, Medicare, etc., from back pay wages.
• Create accounting records for wages paid.

Remember that back pay is subject to the tax year in which you receive it. Don’t make the mistake of classifying these wages under the year when you should have received them.

Next steps for streamlining your payroll process

If you’re a small business owner, you may operate on thin margins. The last thing you want is to deal with an unexpected expense like back pay—and you certainly don’t want to underpay your employees in the first place. 

To help avoid the problem of back pay, consider using payroll software to cut down on human error and save time.