What is back pay? How it works and how to calculate it

Back pay is compensation an employer owes an employee for work they completed but were not paid for. This scenario may arise in various contexts, such as when an employee is not adequately compensated for overtime hours or receives less than the legal minimum wage. Back pay may also be awarded as part of a legal settlement if an employee successfully claims a violation of employment rights, including payroll errors or wage and hour disputes.

Essentially, back pay aims to rectify compensation errors and ensure that employees receive sufficient wages for their work. 

Reasons for back pay

Employees are entitled to back pay when they don’t receive adequate compensation for their work. Whether the culprit is a clerical error, software oversight, or payroll misconduct, employers must ensure employees receive complete wages to avoid legal consequences, mistrust, or turnover. 

Here are some common reasons employees are owed back pay:

• Unpaid bonuses or commissions: Promised bonuses or commissions for meeting performance goals or sales targets that aren’t fully paid out.
• Unpaid overtime: When non-exempt employees work over 40 hours per week but don’t receive the legally required overtime pay. 
• Paying less than minimum wage: Making up hourly wages that were below the minimum wage set by local labor laws. 
• Wrongful termination: If an employee is terminated without proper cause, they may be owed wages for the time they were unjustly dismissed.
• Unpaid wages: When employees aren’t fully paid for hours worked or the pay period completed. 
• Missed deferred payments: Some employee benefits packages include deferred compensation—salary or wages delayed to a later date. If not paid as agreed, the employer may owe them back pay. 

How is back pay calculated?

To calculate back pay, you’ll first need to determine the employee’s regular rate of pay. This is usually their hourly rate, but it may be higher if they receive commission or bonuses.

Once you have determined the regular rate of pay, you will need to multiply it by the unpaid hours of work they have completed. For example, if an employee doesn’t receive compensation for 10 weeks at 40 hours per week, they’re owed 400 hours of back pay at their regular rate.

Back pay is calculated retroactively from the date the original pay period began. For example, if an employee is typically paid biweekly but did not receive their paycheck for the previous two weeks, their back pay would be calculated from the date of the last paycheck they received.

Best practices for back pay

Manual errors and oversights happen, but back pay shouldn’t be treated lightly. Whether you owe money to salaried employees, hourly workers, or independent contractors, back pay is a serious issue. Without accurate, efficient, and swift action, payroll errors can damage team morale, incur financial penalties, and prompt legal repercussions.

Consider implementing best practices to effectively handle back pay, including the following:

1. Keep records up to date 

Accurate, current records are vital for managing back pay. Document essential information, such as pay rates, hours worked per pay period, and changes to employment status. Your payroll software should supply audit trails that record every payment-related action and change. Comprehensive records ensure that your payroll calculations reflect the most current information and allow you to resolve disputes as soon as they occur. 

2. Verify eligibility for back pay

This is when detailed records come in handy. Before processing a back pay adjustment, cross-reference your payroll records against relevant employment agreements and labor laws to prevent unnecessary payments and ensure legitimate claims are addressed. 

3. Check your calculations

Double-check all calculations to ensure accuracy. Mistakes in back pay calculations will create financial discrepancies that impact both the employee and the organization, creating more work while jeopardizing trust and team morale.

4. Flex your teamwork skills

Pay discrepancies don’t just concern payroll and the employee. Bring human resources and management on board to resolve issues. Accountants, HR, management, the legal team, and the employee should all receive relevant updates and a timeline for back pay. Consistent communication shows that you take compensation issues seriously, minimizing frustrations that interrupt productivity and job satisfaction.

5. Act quickly

Your employees depend on regular, predictable paychecks. An unexpectedly low paycheck can cause financial stress and erode trust in your organization. Swift resolution supports workers’ financial and emotional wellness. A back pay issue should be a top priority that incites immediate action.

6. Audit your payroll processes

Pay disputes should be infrequent. When you resolve a back pay dispute, audit your payroll protocols and make necessary adjustments to prevent recurrence. Regular issues signal that you should better integrate and automate payroll software, tighten payroll system protocols, or outsource to a professional payroll service.

Retrieving back pay

Trust, fairness, and a positive reputation are good reasons to take back pay seriously. Legal action is another. In the United States, thanks to the Fair Labor Standards Act (FLSA), employees are guaranteed protections over their wages. Failure to fairly pay employees can lead to significant legal repercussions.

Here’s how the FLSA addresses back pay:

• Payment supervision: The Wage and Hour Division of the Department of Labor might intervene and oversee the payment of back wages. These checks and balances ensure that payments are accurate and compliant.
• Federal lawsuits: The Secretary of Labor can file a lawsuit to recover back pay. In some scenarios, lawsuits may demand additional damages, potentially doubling an employer’s financial liability. 
• Employee lawsuits: Under the FLSA, current and former employees can pursue private legal action. Private lawsuits might also include damages, attorney fees, and court costs. 
• Injunctions: Whether wage violations are chronic or a one-time error, the Secretary of Labor can pursue an injunction to prevent repeated FLSA violations. This court order enforces compliance (e.g., requiring employers to adhere to minimum wage requirements or pay out overtime hours). 
• Statute of limitations: The FLSA guarantees employees two years to file a claim for back pay. If an employer intentionally violates wage and salary obligations, an employee has three years to file a claim. 

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FAQs

Still have questions? We have answers. 

Where can an employee see details of their back pay?

When an employee receives back pay, it will appear as a separate item on their payslip. Typically, the item will detail the amount of back pay and its reason, such as unpaid overtime or adjustments for a missed pay raise. Employers should provide detailed information to ensure that back pay is easily confirmed. 

What is retroactive pay, and how does it differ from back pay?

Retroactive pay, aka retro pay, is commonly confused with back pay.

Retroactive pay is when an employee is underpaid, usually because of payroll errors or delays. This might include a mistake in calculating pay rates, pay increases, tax deductions, or contributions. Back pay generally refers to compensation owed due to underpayment or wage violations, including unpaid overtime, minimum wage violations, or legal disputes between employers and employees.

Retroactive payments are usually settled privately and are either paid out in the next pay period or a one-time lump sum. In contrast, back pay is frequently settled after a legal resolution. 

How long do I have to provide back pay to employees?

There are no federal timeframe mandates, but that doesn’t mean employers can pay back-owed wages at their leisure. Local and state labor laws may have regulations to ensure swift payment. Likewise, unionized workforces may have back pay provisions in their collective bargaining agreements. 

Delaying payment—whether in violation of regulations or not—can lead to severe compliance penalties, legal settlements, and damages. Prompt payment prevents a domino effect that negatively impacts your bottom line and team morale.