Definition
The term back pay refers to the difference between the amount of wages paid an employee and the amount owed an employee. Back pay is owed an employee if the hourly wage rate paid was too low, or the number of hours paid were too few.
Calculation
Back Pay = Wages Owed Employee - Wages Paid Employee
Explanation
Also referred to as backpay, employers may owe back pay to an employee as a result of a failure to comply with, or an error occurs in, the payroll administration process. When a wage violation occurs, an employer is required to provide the difference between the wages owed the employee and the wages paid to the employee. Circumstances that may warrant back pay include:
Hourly Rate: the employee was paid an hourly wage that was lower than the correct wage.
Overtime: the hourly wage paid was the employee's straight time rate, not the agreed-to overtime rate of pay.
Work Hours: the employee worked more hours than those reported and used during the payroll run.
Normally, a two-year statute of limitations applies to the recovery of back pay; however, in cases of willful violations, a three-year statute of limitations may apply.
