Back pay is any form of unpaid compensation an employer owes an employee. 

Employers must pay any unpaid compensation they owe employees for their work, including salary, hourly wages, overtime, bonuses, commissions, or statutory benefits. 

If an employer does not pay employees accurately and promptly, their employees may be entitled to back pay.

Sometimes, the employer may resolve the issue by simply compensating the employee for their unpaid wages. However, an employee may also file a lawsuit for a compensation violation. If so, the employer may owe money for damages and fees for court costs and legal representation. 

Examples of back pay

Back pay includes any type of compensation an employee is entitled to but has not received from their employer. Examples of back pay include the following: 

  • Unpaid wages or salary for work performed
  • Unpaid bonus money or commissions
  • Unpaid wages for overtime hours worked
  • Unpaid wages from a final pay period after an employee’s resignation or termination
  • Unpaid statutory benefits, such as paid vacation or paid sick leave

Back pay vs. retro pay

Back pay is any compensation an employee is owed but did not receive. For example, if an employee receives no pay for their overtime hours, the employer owes them back pay.

Retroactive pay, or retro pay, commonly refers to when an employer underpays an employee for work already performed and must pay the difference between what they paid and what they should have paid. For example, if an employer pays an employer underpays an employee for the hours they worked during the last pay period, the employer owes them retroactive pay.

However, some jurisdictions or companies do not distinguish between back pay and retro pay and use the term retroactive pay to describe the process of any type of employee reimbursement.

Is back pay mandatory?

Back pay statutes vary worldwide and depend on country-specific regulations, so employers should do their due diligence to ensure they comply with global employment laws.  

For instance, U.S. employees are entitled to back pay under the Fair Labor Standards Act (FLSA). A U.S. employer is liable for back pay if they unlawfully withhold an employee’s compensation, such as failing to comply with minimum wage standards or paying overtime.

If a U.S. employee believes their employer has paid them less than what they owe, they can file a claim with the U.S. Department of Labor for back pay and sue the employer.

Why employers may owe back pay to employees

There are many reasons why an employer may owe back pay to employees, from honest mistakes to deliberate attempts to avoid paying an individual for their work. 

Some common reasons for employers owing back pay include the following:

  • Payroll calculation errors. An employee receives incorrect pay due to a wage calculation mistake. An employer might input the wrong pay rate, calculate the number of hours worked or pay rate incorrectly, or deduct too many tax withholdings.
  • Misclassification. An employer incorrectly classifies an employee as an independent contractor, denying the employee their employment entitlements, benefits, and other protections.
  • Wrongful terminations. An employer terminates an employee without a valid cause. In this case, an employee may seek back pay on grounds of wrongful termination if the termination was discriminatory, retaliatory, or in breach of the employment contract.
  • Not paying minimum wage. An employer fails to pay an employee the statutory minimum wage required by law. Minimum wage requirements vary worldwide, but most countries regulate the minimum amount an employer must pay their employees
  • Not paying overtime wages. An employer does not pay the legal wage for hours worked beyond the required work week. For example, the U.S. Fair Labor Standards Act (FLSA) requires employers to pay eligible employees 1.5 times their regular pay rate for any hours worked over 40 hours a week.
  • Not paying miscellaneous compensation. An employer may owe back pay for failing to pay employees for vacation time, sick leave, or other statutory benefits.

Learn how outsourcing payroll to a global payroll partner can help you avoid payroll errors, including back pay, when paying your distributed workforce.

Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is" and Velocity Global makes no representations or warranties concerning this information.

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