What is back pay?

Back pay refers to payment for previously completed work that you owe to an employee. It is the remaining amount of money employees are entitled to after they receive their paycheck. The Fair Labor Standards Act (FSLA) requires you to pay employee wages in a timely manner, such as regularly scheduled paydays. If you miss some or all of a worker’s wages, you owe them back pay.

Related: Determining Total Work Hours Per Year and Pay Period

Examples of back pay

There are several reasons why employees might be entitled to back pay. Staff members are sometimes entitled 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 paid employees less than they earned. Team members are likewise 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. Owed-back pay is typically calculated based on the date the employee was terminated.

Best practices for back pay

Any task that’s related to an employee’s compensation should be handled with care. Within human resources, there are several best practices for administering back pay and processing payment requests from employees. Here are some of the best practices 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, keep managers, employees and accountants aware of the payroll update and the timeline for issuing the paycheck. Communicating with others helps manage expectations and assures every member of the team that you’re addressing the issue.
• Use teamwork: 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 take 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 usually includes three key steps:

1. Confirm eligibility

Before sending out a paycheck, confirm the employee is eligible for back pay in the amount requested. 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 helps your company spend the appropriate amount of money on payroll.

2. Balance the budget

To pay an employee an increased amount, check that the budget has been appropriately balanced and the payment was approved. Promptly complete any paperwork that you need to file to have the employee paid from a different account.

3. Update records

Once you’ve sent the paycheck, keep a copy for your records as confirmation that the payment was made. As a business owner, you’re responsible for ensuring that outstanding payments have been issued and that HR keeps accurate records. Keeping a detailed and organized system for changes to payroll is essential for managing a company’s human resources budget.

How do you calculate and issue back pay?

Calculating back pay can look different depending on whether employees are salaried or hourly as well as the manner of compensation they’re owed. You’ll typically calculate back pay at the same rate as a regular paycheck unless the employee is entitled to a higher rate due to a raise, bonus overtime or other factors. If you already issued payment for the given period but it’s still less than the employee is owed, the amount of back pay will be the difference between what they are owed and what they were already paid. You’ll also need to apply regular deductions to back pay, such as Medicare and Social Security. To calculate back pay for an hourly employee:

1. Calculate the number of hours worked for which pay is still owed.
2. Multiply hours by hourly pay rate.
3. Adjust for factors such as unpaid breaks and overtime.

To calculate back pay for a salaried employee:

1. Determine the number of pay periods in a year.
2. Divide the employee’s salary by the number of pay periods to calculate the pay owed per period.
3. Multiply by the number of pay periods they’re entitled to back pay for.

Related: A Guide to Salaried Employees: Everything To Know About Hours, Overtime and More

Taxes

Because back pay is earned by an employee for work they completed, it’s subject to the same taxes as their regular paycheck. The Internal Revenue Service (IRS) considers it income. You should deduct any applicable taxes from back pay based on the tax year it’s issued and not the year it should have been paid.

Frequently Asked Questions about back pay

How long do I have before I pay my employees?

The Fair Labor Standards Act (FLSA) requires that wages be paid promptly. This usually means all wages must be paid by the next regular payday. State employment laws establish specific deadlines for paydays.

What is retro pay?

Some payroll software programs use the term retro or retroactive pay. These programs typically define retro pay as payments made to employees to correct errors in payroll calculations. In this case, back pay is used only to describe when an employee was not paid at all.

What happens if an employee reports a company for back pay owed?

Complaints filed with the U.S. Department of Labor (DOL) may lead to an investigation or audit. The DOL then examines all employee pay records for violations. At the conclusion of the audit, the DOL calculates all wages owed to employees and ensures they receive payment. The Secretary of Labor may also file lawsuits against companies that owe back wages. Employees may sometimes sue employers for back pay and receive damages in addition to owed wages.

What is back pay under a statute?

With back pay under a statute, an employee receives the amount of money they would have earned if their employer had adhered to an employment statute, such as:

• Age Discrimination in Employment Act
• Equal Pay Act
• Americans with Disabilities Act
• Minimum wage laws
• National Labor Relations Act
• Fair Labor Standards Act

For example, if a court finds that a company failed to meet the guidelines of the Equal Pay Act when paying a particular employee, the employer will be forced to pay the difference between what the individual made and the amount the law entitles them to. In this case, the IRS may consider the payment to be a personal injury claim rather than wages, leading to different tax treatment.