Back Pay: Definition, Eligibility, and How To Calculate

What Is Back Pay?

Back pay is the amount of salary and other benefits that an employee claims that they are owed after a wrongful termination or another improper change in salary status. Back pay is typically calculated from the date of termination to the date a claim was finalized or judgment was rendered.

Key Takeaways

  • Back pay is the amount of salary and other benefits that an employee claims that they are owed.
  • The most common reason to claim back pay is for wrongful termination. However, employees who have been underpaid, discriminated against, or passed over for promotions may also be eligible for back pay.
  • Employers who are responsible for back pay must repay the employee's salary and benefits as if the employee hadn’t been terminated.   
  • Companies may insure against the risk of owing back pay to wrongfully terminated employees through employment practices liability insurance policies. 
  • The statute of limitations for back pay is two years, or three in the case of willful violations.

How Back Pay Works

If an employer withholds your pay for any reason, you may be entitled to back pay. The Fair Labor Standards Act (FLSA) has provisions to protect workers from unfair labor practices and empowers the U.S. Department of Labor to file a suit on your behalf. You can also file suit yourself, and claim not only back pay but also damages and attorney fees. The first step is to report the violation to your state and federal departments of labor.

The statute of limitations is two years for unintentional violations, and three years for willful underpayment.

Reasons for Back Pay

The most well-known reason to claim back pay is for wrongful termination claims. However, you may be eligible for back pay for any kind of underpayment, whether or not the violation was intentional.

Some other reasons you might be owed back pay:

  • Minimum wage violations
  • Unpaid overtime
  • Unpaid bonuses or commissions
  • Wage theft/tip theft
  • Misclassification (categorizing hourly workers as salaried workers)
  • Discrimination in salaries or promotions (for example, if you are passed over for promotions due to membership in a protected class).
  • Accounting errors

The statute of limitations for back pay claims is two years for unintentional violations, or three years for willful underpayment.

Special Considerations

The amount of time it takes an insurance company to complete the claims process and determine if back pay is due depends on the complexity of the case. In some instances, a claim may be resolved quickly; other cases may take years to fully settle. In the case of a wrongful termination claim by an employee, the employer will be liable for the salary and benefits that the employee would have earned had they not been terminated.

Companies may insure against the risk of owing back pay to wrongfully terminated employees through employment practices liability insurance policies. This type of insurance protects the business against claims by employees (or former employees) that their legal rights were violated. It can be purchased as standalone insurance coverage, and also protects against the risk of claims made by employees for discrimination, sexual harassment, and other employment-related issues.

Small businesses may find themselves unable to absorb the cost of back pay to wrongfully terminated employees because their revenues are not as high as large corporations. One way to protect against this risk is to add an employment practices liability insurance endorsement to their business owner policy (BOP).

Collecting Back Pay

The Fair Labor Standards Act (FLSA), the Davis-Bacon Act and the Service Contract Act (among other laws) include provisions for recovering back pay. Methods for collecting back pay prescribed by the FLSA include:

  • The Wage and Hour Division or the Secretary of Labor might supervise the payment of back wages, sometimes through litigation.
  • The Secretary of Labor might instigate a lawsuit for back wages and an equal amount as liquidated damages.
  • An employee can file ​a private suit against an employer for back pay plus attorneys' fees and court costs. In some cases, employees can also request that benefits be included in the total back amount to be repaid.
  • The Secretary of Labor can obtain an injunction to restrain an employer from violating the FLSA. This violation can include unlawfully withholding proper minimum wage and overtime pay.

Example of Back Pay 

For example, let's say a manufacturer fired an employee on June 20, 2016. The employee felt that the termination was unwarranted, and filed a claim against the company. During the court proceedings, it became apparent that the employee’s manager had a personal problem with the employee, who was fired for reasons other than professional conduct and performance. The court required the employer to reinstate the employee, with the judgment coming on Jan. 15, 2020. The employer is liable for back pay from June 20, 2016, until Jan. 15, 2020.

Why Do I Have Back Pay?

If you are owed back pay, you may have been unpaid or underpaid by a previous employer. Common reasons for backpay include unpaid overtime, minimum wage violations, accounting errors, and wrongful termination.

Does an Employer Have to Pay Back Pay?

If an employer is found to have underpaid or wrongfully terminated an employee, they must repay the full amount owed.

How Does an Employer Back Pay an Employee?

Most employers insure against owing back pay by purchasing employment practices liability insurance. If an employee makes a successful claim for back pay, the insurer will pay the amount owed.

How Is Back Pay Calculated?

An employer who owes back pay must repay the full value of the employee's salary and benefits, from the date the underpayment began until the claim is filed, finalized, or judgement rendered. Employees may also be eligible for damages or attorney's fees.

How Do I Get My Unemployment Back Pay?

Each state has different unemployment laws, but unemployment payments may be retroactive to the first date of eligibility. If you have not received your full employment payments, the first step is to contact your state's Department of Labor.

The Bottom Line

Back pay is one of many measures to protect the rights of workers from their employers. If you have been underpaid or wrongfully terminated, the government will help you recover back pay and additional damages without having to file a lawsuit yourself.

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