A Comprehensive Guide on the concept of Back Pay

Employers must pay employees accurately and on time. Failure to do so can lead to back pay claims, and in some cases, legal action. Understanding back pay is crucial for managing this risk. Aniday's article offers insights on back pay for both employees facing wage issues and businesses seeking to navigate the process.

What is Back Pay?

Back pay refers to the sum of the salary and additional benefits that an employee asserts they are entitled to following an unjust termination or any other inappropriate alteration in their salary arrangement. The calculation of back pay generally encompasses the period from the date of termination to the moment when a claim is ultimately resolved or a legal decision is reached.

How does it work?

When employees are eligible for back pay, their employer is required to disburse the owed sums. In certain instances, this entails reimbursing employees for their outstanding wages. However, if the employees take legal action, the employer might also be liable for an equal sum in liquidated damages, in addition to covering attorney's fees and court expenses.

What are the reasons for Back Pay?

The most widely recognized basis for pursuing back pay is in cases of wrongful termination. Nonetheless, you may qualify for back pay in situations of underpayment, regardless of whether the infringement was deliberate.

Additional circumstances that could result in owed back pay include:

• Breaches of minimum wage regulations

• Uncompensated overtime hours

• Unpaid bonuses or commissions

• Wage or tip appropriation

• Misclassifying hourly employees as salaried staff

• Salary or promotion discrimination, such as being denied promotions based on belonging to a protected group

• Accounting mistakes

An example case of Back Pay 

For example, let's consider a situation where a manufacturer terminated an employee on June 20, 2016. The employee believed the termination was unwarranted and filed a claim against the company. As the legal proceedings unfolded, it became evident that the employee's dismissal was unrelated to professional conduct and performance but rather resulted from a personal issue with their manager. The court ordered the employer to reinstate the employee, with the official judgment delivered on October 25, 2023. Consequently, the employer is now responsible for paying back wages from June 20, 2016, up to October 25, 2023.

How to calculate Back Pay?

Employers with back pay obligations must reimburse the complete salary and benefits owed to the employee, spanning from the commencement of the underpayment until the claim is submitted, resolved, or a judgment is delivered. In addition, employees might qualify for damages or have their attorney's fees covered.

How is back pay recovered?

Employers who don't correct payment errors may face consequences under the Fair Labor Standards Act (FLSA):

• The Department of Labor may oversee back wage payment.

• The Secretary of Labor can file a lawsuit to recover back wages and liquidated damages.

• Affected employees can file a private suit for back pay, liquidated damages, attorney's fees, and court costs.

• The Secretary of Labor may seek an injunction to prevent FLSA violations, including withholding minimum wage and overtime pay.

• The FLSA sets a two-year statute of limitations on back pay recovery, which extends to three years for willful violations. State laws may offer additional remedies and longer statutes of limitations.

Best Practices for Managing Back Pay

As an employer, take these practices into consideration to better manage Back Pay 

Maintain Accurate Records

To ensure each employee receives the correct compensation, maintain precise data regarding employee pay rates and past paychecks. Comprehensive records detailing payment frequencies and amounts aid in maintaining a well-balanced budget for your business.

Take Prompt Action 

Once you become aware of any owed back pay, initiate the necessary steps immediately to update the employee's forthcoming paycheck. This proactive approach guarantees that team members are paid in a timely fashion.

Exercise Careful Calculation 

Double-check your calculations to ensure that the employee receives the accurate back pay amount. Errors in computation could lead to additional back-pay claims.

Sustain Open Communication

During the back pay process, keep managers, employees, and accountants informed about the payroll adjustments and the timeline for disbursing the paycheck. Consistent communication helps manage expectations and assures every team member that you are addressing the matter.

Leverage Team Efforts 

Calculating back pay can be a complex process with potential financial and legal ramifications. Collaborating with other HR professionals, members of the accounting department, and your legal team can facilitate the proper management of back pay in accordance with company policies.

What actions should a company should take for Back Pay?

When a request for back pay is received from an employee or their manager, it is essential to closely adhere to your company's established procedures. 

This not only ensures that employee expectations are met but also helps prevent any processing delays. The standard protocol for disbursing back pay typically involves three crucial steps:

Confirm Eligibility

Before issuing a paycheck, verify that the employee is indeed eligible for the requested back pay amount. Collaborate with their manager and other team members to ascertain the employee's eligibility for retroactive benefits or to determine if they worked more hours than they were originally compensated for. 

This confirmation process ensures that your company allocates the correct payroll funds.

Budget Adjustment

To accommodate the increased payment to an employee, ensure that the budget is appropriately balanced and that the payment has received the necessary approvals. Timely completion of any required paperwork for processing the payment from a different account is essential.

Record Updates

After the paycheck has been dispatched, retain a copy for your records to confirm that the payment has been successfully made. As a business owner, it is your responsibility to guarantee that outstanding payments have been settled, and that HR maintains precise and organized records. 

Maintaining a detailed system for payroll modifications is vital for effective human resources budget management.

What should employees notice about Back Pay?

Below are some information employees should be aware of regarding Back Pay:

How can I obtain back pay?

Employees who believe they are owed back pay typically begin by attempting to address the matter directly with their employer. If this fails, employees have the option to seek assistance from the Department of Labor or their state's labor department. Alternatively, they can file a private lawsuit against their employer if permitted by law.

When will I receive my back pay?

The laws govern the frequency of employee wage payments, but, in general, employers are obligated to provide employees with their full entitled wages by the next scheduled payday. In cases involving a legal dispute regarding wage claims, payment may be delayed until a resolution is achieved.

Is back pay subject to taxation?

If employees who were underpaid had received the full owed amount on their regularly scheduled payday, it would have been subject to taxation. Consequently, back pay is subject to the same taxes in the year it is disbursed.

Conclusion

Back pay is among the various safeguards in place to uphold the rights of employees against potential employer injustices. Aniday hopes this article has given you an overview about back pay and what you need to do whether you’re the employee that experiences injustice from your company or you’re a business that needs to know how to manage the Back Pay process.