Back pay is the amount of money from salary or other benefits that an employer owes an employee. For instance, if an employee is terminated but hasn’t received their last paycheck months later, that can be termed back pay. Or if someone was contracted to do work and they did it but were only paid for part of the job and are still owed money.
Key Takeaways
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Back pay refers to financial compensation that an employee is owed by an employer, and it can be the result of several different situations, both willful and unintentional.
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The Department of Labor and the Fair Labor Standards Act are charged with ensuring employees are treated fairly and make determinations in back pay situations.
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Employers can get liability insurance that will help protect the financial assets of the company in the event of a back pay lawsuit.
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If there is wrongful termination and back pay is owed, it can be very expensive and difficult for the employer to recover.
What Is Back Pay?
Back pay is financial compensation that someone is owed for doing a job but hasn’t been paid. It’s often associated with legal fees assigned to an employer in a wage violation case or wrongful termination suit, but that’s not always the case.
Sometimes back pay is owed because a job is completed, and the person who hired them simply doesn’t have the money to pay immediately.
Back pay isn’t just salary, hourly wages, or the remainder of a lump sum payment. Back pay can include overtime pay, fees, bonuses, commissions, and other financial obligations owed for work.
What Employers Need to Know About Back Pay
The Department of Labor and the Fair Labor Standards Act (FLSA) are places of reference when it comes to labor contract disputes. It’s not okay to arbitrarily decide that someone doesn’t deserve all of the pay they’re contracted to receive, even if they didn’t complete the job.
It’s best to check with an attorney to determine what needs to be paid and to see if an agreement can be reached.
There is a two-year statute of limitations applied to the recovery of back pay, so no one can come back to an employer five years after they were terminated and try to get a windfall. If the employee can prove that the employer willfully violated fair pay standards, they have a three-year window in which to bring suit.
Fair Labor Standards Act (FLSA)
The FLSA was established to set laws regarding employer and employee relationships to prevent the private sector from taking advantage of employees, protect minor employees, and set minimum standards for payment and recordkeeping. Key areas of the FLSA that can come into play in any back pay dispute include:
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Minimum wage. The federally mandated minimum wage is $7.25 an hour. Many states have higher minimum wage laws, and the employee is entitled to a higher wage.
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Overtime. Employees who are nonexempt, which usually means hourly, must receive overtime pay for hours that exceed 40 in one work week at a rate of one and one-half times their regular pay or more.
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Hours worked. Hours worked are generally defined as all the time you’re required to be on the employer’s premises, on duty, or at a prescribed workplace.
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Recordkeeping. Employers must keep employee time and pay records.
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Child labor. These laws are designed to protect children and their educational opportunities. It doesn’t often come into play when back pay is involved unless a child is paid unfairly.
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Tipped workers. In 2020 and 2021, the FLSA added amendments that prevent employers, managers, and supervisors from keeping employees’ tips.
Reasons for Back Pay
The most common reason employees file suit for back pay is wrongful termination, but there are other reasons, both willful and unintentional. Some reasons you might be sued for back pay include:
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Minimum wage violations
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Unpaid or wrongly calculated overtime
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Unpaid bonuses and commissions
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Wage or tip theft (withholding tips is tip theft)
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Categorizing hourly employees as salaried
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Discrimination in regard to promotions and pay
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Unintentional errors in accounting
There are other reasons that an employee or contractor could believe they’re due more pay than they received, but these are the most common.
Liability Insurance and Back Pay
Employment Practices Liability Insurance (EPLI) is a type of insurance that employers can purchase to protect themselves from lawsuits filed by employees. Smaller companies may be able to get this insurance as a part of their Businessowner’s Policy rather than taking out a separate EPLI plan.
EPLI is a broad-reaching plan that doesn’t just cover a business in the event of a back pay lawsuit, there are many other situations that could result in legal action from an employee against an employer, and EPLI will step in those situations also to cover losses in a lawsuit.
This insurance will also pay for legal costs, whether the company wins or loses. They will not cover punitive damages or fines.
Back Pay vs. Retroactive Pay
Retroactive pay is similar to back pay and is sometimes categorized as back pay. Back pay is money an employer owes an employee for work that’s been completed. Retroactive pay is money that’s owed for underpayment.
For instance, an employee was paid for all 40 hours they worked in a week, but they were mistakenly paid a rate that was lower than what they were supposed to earn. That difference is their retroactive pay. But again, this isn’t always broken out as separate categories and often falls into a back pay bucket.
How Back Pay Is Collected
It is possible, in some situations, for an employee to realize they weren’t paid what they were owed and bring it up to the employer and receive payment without further incident or action. Sometimes accounting errors happen, or there are miscommunications within a company that can cause a back pay situation.
If it’s not an amicable situation or an obvious oversight, then an employee must file a claim with the Department of Labor under the Fair Labor Standards Act to get back the money they feel they’re owed. An investigation will follow, and both employer and employee will have to offer as much proof as they can to prove their side of the case.
Wrongful Termination and Back Pay
The most common cause for back pay cited is wrongful termination. This can get quite tricky and complicated, and it can end up being very expensive for the employer if they lose. When there is a wrongful termination case, the back pay extends from the date of termination until the date a judgment is reached. Sometimes it can take years for a judgment to be rendered.
In addition, if the employer is found guilty of wrongful termination, they may be forced to rehire that individual at their former position. This can lead to numerous issues when it comes to the atmosphere and culture of a company.
Back Pay FAQ
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Does an employer have to pay back pay?
Yes, an employer has to pay back pay if it’s indeed determined that the employee is due that pay.
If a back pay claim is taken to the Department of Labor and it’s determined under the Fair Labor Standards Act that the employee is due back pay, then the employer must pay the full amount owed. If it’s a wrongful termination suit, the employer may be required to pay from the date of determination until the judgment date.
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How is back pay calculated?
Back pay is calculated from the date that the underpayment or non-payment occurred until the date of judgment in many cases. There are situations where the back pay amount is a set fee or occurred in a defined time frame; if this is the case, then this will be used to determine back payment amounts.
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Is back pay insurance required for employers?
Back pay insurance falls under a liability insurance policy, and it is not typically required. While liability insurance is required for most employers, back pay falls under employment practices liability insurance and may not be required. It’s a good idea to protect your business’s assets with this type of liability.
Small businesses may not be able to afford EPLI, but they might have some protection from back pay lawsuits built into their Business owner’s Policy.
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What should an employee do if they feel they’re owed back pay?
If an employee was wrongfully terminated or believed they are owed back pay, they should contact the Department of Labor in most situations.
There are some cases where there was a simple accounting error, or the human resources department wasn’t aware of the effective date of a pay raise. These situations can be resolved by reporting the error to management without escalating it to the Department of Labor.
More often than not, when an employee believes they’re due back pay, there is a more grievous error or issue in play, and it’s best to get advice from the Department of Labor. They will be a case and review both sides of the equation to determine whether back pay is owed.
Author
Kristin Kizer
Kristin Kizer is an award-winning writer, television and documentary producer, and content specialist who has worked on a wide variety of written, broadcast, and electronic publications. A former writer/producer for The Discovery Channel, she is now a freelance writer and delighted to be sharing her talents and time with the wonderful Zippia audience.
