What is Back Pay? Basics & Examples of Back Pay

Everyone expects to be paid fairly for the work they do. However, sometimes employees are paid less than what they are owed 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 receive these earnings. When you receive the wages you’re due for past work, this is called back pay. In this article, we’ll take a closer look at the meaning of back pay and explain how it works. Read on to learn all about what back pay is. We'll take you through:

• What is back pay?

• How does back pay work in the UK?

• Reasons an employees can claim back pay

• Are employers required to pay back pay?

• How to issue back pay to employees

• How to collect back pay from your employer

• How is back pay calculated?

• Use payroll software to avoid pay issues

What is back pay?

Back pay is the difference between the amount of pay a worker is owed versus what they actually received. It is a term for wages owed for work done in the past that has been withheld from the employee’s paycheck. 

There are numerous reasons why an employee might be entitled to back-paid wages. Common reasons back pay may be awarded include delayed raise pay rises, unpaid overtime, accounting errors and more. Under UK law, employers are required to issue back pay to employees who have a valid complaint.

How does back pay work in the UK?

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 to back pay, the employer will have to pay you the wages you’re entitled to.

Back pay works differently in different organisations, depending on how payroll is processed by HR or accounting. Best practice is for whomever is responsible to check for overtime or additional compensation to ensure the right money is paid to employees. 

Reasons employees can claim back pay

There are many reasons an employer might owe back pay to a particular employee. In some cases, accounting errors are an honest mistake sparked by a misclassification or human error. 

In other cases, pay may be withheld by employers for less savoury reasons. In this section, we’ll go over some of the most common reasons an employer might owe back pay.

Minimum wage infractions

If an employer does not pay at least minimum wage to the correct number of workers covered by recent minimum wage law, these workers are owed back pay. These laws clearly state modern wage requirements, and any shortfall will be owed to the employees who have not been paid correctly.

Unpaid overtime

When an employee works for longer than their contracted hours, they may be able to claim back pay. Sometimes this can be caused through human errors, such as the extra time worked not being recorded. But sometimes employers refuse to pay overtime if it was not pre agreed. If overtime has been pre agreed and the employer still refuses to pay, they are still liable to pay what they owe.

Dismissal without cause

If an employer violates an employment contract or law when firing an employee, the employee may sue for wrongful dismissal. An employer can be liable to pay back pay if they are found to have wrongfully dismissed an employee. The relevant legal body will render a judgement on a case by case basis. 

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 the incorrect amount of 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 way to avoid accounting errors is to use dedicated payroll software that can automatically pay employees the right amount each month.

Are employers required to pay back pay?

Yes, employers are required to issue back pay when they commit a wage infraction. It doesn’t matter whether it was intentional or not—if an employee is owed money, the employer has to give them what they’re due according to their contract. This means the employer must pay the employee the full amount owed in back pay. An employer can face penalties from HMRC if they do not pay back pay when required. 

How to issue back pay to employees

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.

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.

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

Check their eligibility for back pay

Before making any payments, you need to ensure that the employee in question is eligible for back pay. It’s vital to understand the circumstances of why they may be owed pay. Speak with their manager and colleagues to make sure that their claim is valid, and raise the issue with human resources if needed.

Balance the right budget

Because you’ll be paying the employee manually, you’ll need to ensure the money comes from the correct budget. Ensure the relevant manager or head of department approves the payment before it is sent. Also, it’s vital to complete any additional documentation that allows for the payment to be released from the relevant budget.

Keep your records updated

It’s essential to keep track of this extra payment, so be sure to add it to the correct records immediately. Keep a copy of the new payslip for evidence that the payment was issued. This will help avoid any further issues that could arise from a lack of evidence.

How to collect back pay from your employer

If your employer commits a wage infraction and owes you back pay, you can take action to collect the money you’re owed. 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 resolve it internally.

• If this does not resolve the issue, you can raise an official grievance with your employer. The organisation should already have a grievance procedure in place to accommodate this. 

• Failing that, you can then decide whether to take further action. We recommend seeking legal advice from a qualified provider. This could include utilising an employment tribunal as a last resort.

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. Back pay can only be claimed within 3 months minus a day from when the money should have been paid. 

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 checks before you calculate back pay.

How to calculate back pay for an hourly employee:

• Calculate number of hours worked: Add up the number of hours the employee is owed back pay for

• Multiply hours worked by hourly pay rate

• Adjust for overtime as needed

Here’s an example:

The first step is to calculate your rate of pay. 

If you earn £1,200 per month, your annual wage is £14,400. (Monthly pay times 12).

Accounting for 4 weeks in a month, your daily pay is £60. (20 working days in the month).

For 7 hours per day, this is £8.57 per hour. (Daily pay times hours worked per day).

If you have worked 2 hours overtime every day for a week, this would be 2 hours times 5, equalling 10. This equates to 10 extra hours that week. 

Next, times 10 hours by your hourly pay, coming to £85.70. 

Then you’ll need to determine if overtime is paid equally or over standard time. Let’s say overtime is the hourly rate plus 50%. Your overtime rate would be £12.85. 

Multiply this by the overtime worked (10 hours) and we get to £128.50. This is how much you are owed for your overtime that week.

Depending on your company overtime policy, you may be eligible for back pay for £128.50.

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 an example

• 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.

An example of this would be:

The employee makes £25,000 per year after tax. They are paid 12 times per year, once per month. 

Each month, they will earn £2,083. 

We can then use this figure in the same way as hourly workers to find the hourly and determine the appropriate backpage, eg:

Employee has worked 5 hours overtime every week for a month.

This means the monthly earnings can be divided by 4 (4 weeks per month) to equal £520.75 per week. Dividing this by days (5 days per week) comes to £104.15, their daily earnings. 

Accounting for 7 hours in a working day, this comes to £14.88 per hour. Not considering any overtime benefits, we multiply this figure by 20 (5 hours overtime per week for a month), which comes to £297.60.

Considering the same overtime bonus as above (hourly rate plus 50%), overtime hourly for this person comes to £22.32. We can multiply this by 20 again to reach £446.40, the total backpay for this overtime.

Use payroll software to avoid back 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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