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Back pay vs. retroactive pay

Reasons for back pay

How is entitlement to back pay determined?

What is back pay

Back pay refers to the overdue money an employer owes to an employee for work previously performed but not paid.

Back pay occurs when an employee is not paid the proper wages or salary. For example, when an employer fails to pay overtime or when an employee is wrongly terminated and not compensated for their completed work.

As a form of unpaid financial compensation, back pay intends to rectify any difference between the amount paid from an employer to an employee and the amount they are obligated to pay under contract or law.

Back pay typically covers financial discrepancies between minimum wage and overtime regulations, as well as any benefits or compensation owed.

In most instances, back pay is paid in a lump sum and may involve employer penalties for delay in payment. Back pay laws vary by country—the following information references US regulations and requirements.

Back pay vs. retroactive pay

While similar, back pay and retroactive pay are not synonymous. The main difference between back pay and retroactive pay is the reason for payment.

Back pay is owed compensation for unpaid wages, such as unpaid overtime. Retroactive pay is paid to an employee in the instance of underpayment or an effort to correct the difference between what was paid and what should have been paid.

As an example of retroactive pay, an employer may discover that they have been underpaying an employee due to an administrative error, such as miscalculating overtime hours or failing to account for a pay raise.

In the case of retroactive pay, the employer will correct the error and pay the difference between what the employee was previously paid and what they should have been paid, accounting for a retroactive pay increase or overtime hours.

Reasons for back pay

Unfortunately, unpaid work is a common occurrence, either due to human error or willful wage violations of local and state laws. Consider the following common reasons and examples of back pay.

Incorrectly classified as exempt from overtime

In the US, the Fair Labor Standards Act (FLSA) stipulates that non-exempt employees are entitled to overtime wages for any hours worked beyond 40 hours in a workweek. If an employee is misclassified as exempt and denied overtime pay, they may be entitled to back pay for the unpaid overtime hours.

Misclassification as an independent contractor

Businesses may misclassify employees as independent contractors, which removes the employee’s entitlement to certain employee benefits, minimum wage, and overtime pay. In this instance, employees may be entitled to back pay for any wages, benefits, or compensation denied during employment.

Denied commissions or bonuses

In a business with a commission-based compensation structure, employers may owe back pay when commission or bonus payments are withheld or denied. If withheld intentionally, employers may be required to pay the full payment as well as penalties or interest owed under the wage laws.

Not receiving the minimum wage or overtime rate

In the US, non-exempt employees are entitled to the federal minimum wage and overtime rate of one and a half of their regular pay rate for all hours worked over the 40-hour workweek. Failure to pay minimum wage or overtime entitles the employee to back pay for the total amount owed.

Not being paid for time worked off the clock

If an employee is required to perform tasks and attend work-related meetings or training sessions after stipulated work hours, they should be compensated for their time. If they are not compensated for this time, they may be entitled to receive back pay.

Payroll calculator errors

Sometimes, work goes unpaid due to a genuine mistake, such as payroll calculator errors that incorrectly calculate an employee’s wages and deductions. For example, the payroll calculations may miscalculate their overtime hours, meaning the employers are responsible for recovering back pay.

Take note that robust and reliable payroll software streamlines the process and reduces payroll errors for big and small businesses alike.

How is entitlement to back pay determined?

Failing to pay an employee the appropriate wages for their work violates the FLSA, exposing the employer to legal risk. The entitlement details of back pay are governed by the specific circumstances of each case, which generally involves unpaid wages, benefits, or compensation owed to the employee under their employment contract, company policy, or local law.

The details of the case must be reviewed, including the terms of the employment contract or agreement, the relevant laws and regulations, and any other policy or procedure that was neglected (leading to underpayment).

If an employee is denied payment or experiences wrongful termination when back pay is due, there are different avenues to pursue, all stipulated by the FLSA, which determine the laws and eligibility for back pay.

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