Managing payroll takes focus, time, and attention to detail. While mistakes can be avoided by using payroll systems and software, making payroll mistakes can still happen. It is the responsibility of employers to pay their workers what is due to them. If you miss to give a certain bonus or underpay someone for hours worked, you need to provide back pay.
Back pay is any form of compensation that is owed to an employee that the employer missed or did not pay. It is alternatively called back wages. If you are an employer, you might owe back pay for unpaid wages, missed overtime, commissions, or any missed hours worked. Back pay is also often associated with penalties that employers are required to pay as a result of wage violation cases.
It is important to remember that:
Back pay can come from work that was done by the employee for which they were never compensated.
Back pay can come from work that should have been performed but the employee was prevented from doing the work.
Simply put, back pay is any discrepancy between what the employee was paid and what the employer was required to pay but did not.
How does it work? What are some examples of back pay?
You are entitled to back pay if your employer does not pay or withholds part of your pay without permission.
For example: Carol resigned from her company and her last day of work is on February 25. Her employer only paid her up until the week of February 19. Carol’s employer owes her back pay.
Other examples of back pay are the following:
Unpaid commission resulting from incorrect sales records
Unpaid bonus resulting from the wrong calculations
Unpaid overtime hours
What is the difference between back pay and retroactive pay?
It is easy to confuse back pay and retroactive pay. Because both refer to paying workers past wages, a lot of people think that these terms can be interchanged freely. What is the primary difference between the two?
Back pay is when an employer owes an employee wages that were not paid at all. On the other hand, retroactive pay (or retro pay) is when an employee is paid less than what was supposed to be paid.
Still a bit unclear? Let’s look at an example.
Let’s say Lily worked 40 hours a week. Lily was paid for the 40 hours that she worked. the problem was that her employer paid her the wrong rate per hour, less than what was in her contract. Her employer owes Lily retroactive pay.
On the other hand, let’s say Lily worked for 40 regular hours with additional 4 hours qualified as overtime. Lily was paid correctly for the regular 40 hours but her employer failed to pay her the 4 overtime hours. The missed wages count as back pay.
Back Pay and Employers
Employers are responsible for giving wages due to their workers on-time. If you are an employer and you forgot to pay an employee for overtime or for any other reason that you owe back pay, you must inform the employee about the oversight. You can either run a separate payroll for the back pay or include the back pay on the next regular paycheck.
If an employer fails to pay the proper wages for work performed, this is a violation of the Fair Labor Standards Act (FLSA). An employer may be sued by an employee or by the government for this violation.
According to the FLSA, there are several means by which to recover unpaid back pay:
The Wage and Hour Division of the Department of Labor may supervise the payment of back pay
The Secretary of Labor might sure for back wages
A judgment from a private suit by an employee or a group of employees
An injunction preventing an employer from violating the FLSA
There is a two-year statute of limitation on the recovering back pay. For intentional violations, this is extended to three years.
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