What is back pay?

Back pay refers to payment for previously completed work that an employee is owed. It’s the remaining amount of money employees are entitled to after they receive their paycheck. 

Examples of back pay

There are several reasons why employees might be entitled to back pay. Staff members are sometimes entitled to back pay after earning a promotion, raise or bonus that HR required additional time to process. 

Examples of back pay also include payroll miscalculations that resulted in employees being paid less than they earned. Team members are likewise typically entitled to wages for unpaid regular hours, overtime hours, past salaries, benefits, bonuses, paid time off and commissions. Employees may also request back pay if they believe they were wrongfully terminated from their position and illegally prevented from completing their work. 

Considerations for back pay

Any task that’s related to an employee’s compensation should be handled with care. Within human resources, there are several factors to keep in mind when administering back pay and processing payment requests from employees. 

Here are some things to consider when dealing with back pay as an HR representative:

• Keep accurate data: To make sure each employee is paid the proper amount, keep accurate data on employee pay rates and previous paycheck information. Keeping extensive records on how and when workers are paid will help your business maintain a balanced budget.
• Act quickly: As soon as you become aware that back pay is owed, begin taking the necessary steps to update the employee’s next paycheck. This ensures that team members receive their payments in a timely manner.
• Calculate carefully: Double-check your calculations so the employee receives the correct amount of back pay. Errors in calculation could lead to additional back-pay requests.
• Communicate regularly: When completing the back pay process, consider keeping managers, employees and accountants aware of the payroll update and the timeline for issuing the paycheck. Communicating with others helps manage expectations and ensures that every member of the team is aware that you’re addressing the issue.
• Collaborate across teams: Calculating back pay  can be a complex process and may have financial or legal implications. Collaborating with other HR professionals, members of the accounting department and your legal team can help you manage back pay appropriately and according to company policy.

Actions to consider taking for back pay

When you receive a request for back pay from an employee or their manager, follow your company’s procedures closely in order to meet the expectations of employees and avoid any processing delays. 

The protocol for issuing back pay may include the following steps, depending on your company’s policies:

1. Confirm eligibility

Before sending out a paycheck, consider confirming the employee is eligible for back pay in the amount requested. You may want to connect with their manager and other team members to make sure the staff member is eligible for retroactive benefits or that they worked more hours than they were paid for. 

Confirming that an employee is eligible for back pay can help your company spend the appropriate amount of money on payroll.

2. Balance the budget

To pay an employee an increased amount, consider checking that the budget has been appropriately balanced and the payment was approved.

3. Update records

Once you’ve sent the paycheck, consider keeping a copy for your records as confirmation that the payment was made. Maintaining a detailed and organized system for changes to payroll can be beneficial for managing a company’s human resources budget.

How do you calculate and issue back pay?

The amount of back pay an employee may be owed can depend on factors such as their classification (hourly vs. salaried), how their compensation is structured and whether any raises, overtime, bonuses or other pay adjustments should have applied during the period in question.

Employers might also need to factor in standard deductions, like Medicare and Social Security, when issuing any corrected payments.

For hourly employees, employers often review total hours worked and any applicable premium rates. For salaried employees, they may evaluate how pay is distributed across pay periods and whether the employee missed compensation for any of those periods.

Once the correct amount is determined, employers generally issue back pay as an adjusted or supplemental payment in line with their payroll processes and any relevant wage laws or agreements.