Back Pay

What is back pay?

Back pay is the amount of money an employer owes an employee for work performed but not properly compensated. Back pay can arise from work that:

• Was completed but never compensated
• Could have been done, but the employee was barred from doing it
• Should have been paid differently, given the circumstances at the time

It can also be unpaid money after a raise that was not promptly processed. Generally, it’s any financial difference between what the employer honored in a paycheck and what is stated in their contract or by law on minimum wages and overtime pay.

Back pay can include salary, hourly wages, commissions, overtime, bonuses, or fees and a penalty the employer should pay for violating the wage agreement. 

Employee eligibility for back pay

When an employer unintentionally or intentionally withholds pay from their employee, the employee is entitled to back pay. This means the employee can sue the employer for lost or owed wages. The employer must pay the amount owed if the employee’s claim is valid. Back pay is typically awarded when there is evidence of unpaid wages or wage violations resulting from the employer’s actions or negligence.

Back pay issues and wage violations fall under the U.S. Department of Labor regulations. This department is responsible for ensuring every employee is treated fairly. The Fair Labour Standards Act (FLSA) also establishes the federal government’s minimum wage overtime rules and standards of record keeping for businesses. 

Situations that make an employee eligible for back pay include:

1. Unpaid overtime

According to the FLSA, non-exempt employees are entitled to overtime pay once they surpass 40 hours a week. Overtime pay should be equal to or over 1.5x the current pay. If an employer needs employees to work overtime, they should adhere to these compensation standards.

For instance, if an employee pulls a 45-hour work week but only gets paid for 40 hours at their normal rate, they can claim back pay for the additional 5 hours at the higher overtime rate. 

2. Minimum wage violation

Every employer needs to adhere to the federal and state minimum wage regulations. The federal state minimum wage is the lowest employees should be paid in the US; usually, states have higher minimum wages. Employees not paid the state minimum wage are entitled to back pay. 

For instance, if an employee was entitled to $16 an hour, but the employer paid $13 an hour, they are eligible for $3 back pay for each hour they worked.     

3. Incorrect salary calculation

Sometimes the payroll department makes a mistake in calculating an employee’s pay or adding up the hours worked. Whether the miscalculation is intentional or not, the employee is still owed back pay. 

If an employee worked 40 hours a week but is only paid for 37 hours, or if they got $500 instead of $600 for a 40-hour week, they are entitled to back pay.  

4. Wage increases

When you give an employee a pay rise, the payroll systems should be updated before the next payday. However, it doesn’t always happen, and the payment is still calculated at the previous rate. This creates grounds for back pay.

For instance, if you give an employee a raise from $13 to $15 an hour but forget to run the payroll at the new wage rate, you’ll owe back pay for the difference in the raise for hours worked. 

5. Unpaid bonuses or commission

When you promise an employee a commission or a bonus and fail to deliver, you can be forced to pay. 

If you give an employee a $250 bonus but forget to include it in their paycheck, you’d need to pay the employee $250 in back pay to cover the missed wages. 

6. Incorrectly classified employees (exempt versus non-exempt)

A misclassified employee should get paid for their overtime at an overtime rate but isn’t because they are classified as exempt from overtime. 

If you have a full-time employee but classified them as an independent contractor, the employee is entitled to unpaid overtime wages.  

7. Wrongful termination

If you fire an employee and violate the employment law or contract, the employee can sue for wrongful termination. If they succeed in their claim, they get back pay for lost time and would have been working. 

For instance, if an employee gets injured while working, and you fire them because they cannot work or they were pursuing a worker’s compensation claim due to the injury. If they succeed, you’ll pay back pay for lost wages from when you fired them and when the claim was ruled on.

8. Discrimination

Pay discrimination is when employees doing the same work receive different pay. Job equality is usually determined by job content and not job titles. Individuals doing the same job with the same skill, responsibility, and effort and working under the same conditions should be compensated equally. Discrimination can be due to race or sex.  

If Employee A and Employee B work for the same employer and their jobs are equal, but Employee A receives a $350,000 salary, and Employee B receives $500,000, employee A can claim back pay. The amount paid will be the difference between pay without discrimination and his actual pay. In this case, $150,000.

Note: If the employer fires an employee due to discrimination, the employee is also entitled to front pay.  

Calculating back pay

Back pay calculations differ for employees on salary and those paid hourly. 

Hourly employees

For hourly employees, the calculations are:

• Determine the number of hours the employee worked
• Multiply these hours by their hourly rate
• Adjust for overtime if any

For instance, if an employee earning $20 an hour is wrongfully terminated on January 2024, they can file a claim for wrongful termination and back pay. If the case is concluded in September 2024 and the employee wins, the employer will pay the following: 

$20/hour x 40 hours a week x 4 weeks = $3,200 a month

$3,200 a month x 8 months = 25,600 in back pay

Salaried employees

For employees on a salary, back pay is calculated differently:

• Determine how many pay periods there are in a year
• Divide employee wages by pay periods to determine how much they get paid every pay period
• Multiply the pay periods with the amount to get back the pay owed. 

For instance, if an employee earns $100,000 and there are 52 pay periods, they get:

$100,000 salary/52 pay periods = $1,923.08

$1,923.08 every pay period x 16 pay periods = $30,769.23

Wage records and documentation

If an employer doesn’t keep good wage and time records, they risk losing back pay claims under the FLSA. In back pay claims, the burden of proof is on the employer to prove whether the records are true. 

In such situations, the Department of Labour or employee only has to prove there’s a just and reasonable inference that the pay and time worked are according to available records. If the employer cannot prove otherwise, they are ordered to pay back pay even when the calculations are inaccurate.  

Factors HR should consider in calculations

Several factors can affect how back pay calculations are done. These include:

• The jurisdiction: Different states have different laws on back pay.
• The type of violation: Generally, an employee claiming back pay for unpaid wages receives a different compensation than an employee claiming back pay for holiday time.
• The statute of limitation: Usually, employees have 2 years to claim their back pay. This timeframe varies depending on the type of violation and state.