Glossary of Human Resources Management and Employee Benefit Terms
Back pay is any form of unpaid financial compensation owed to an employee by their employer. Back pay may come from work that:
Was performed but never paid for
Could have been performed but the employee was prevented from performing
Should have been compensated differently under the circumstances
Back pay makes up any discrepancy between what the employer paid an employee and what the employer was required to pay as stated in a contract or by law under minimum wage and overtime guidelines. Back pay may include salary, hourly wages, overtime, fees, bonuses, or commissions and is often associated with the penalty an employer must pay as the result of a wage violation case.
Retroactive pay is similar to back pay in that it is money an employer owes an employee for work that was already performed. However, back pay is for unpaid work, whereas retroactive pay is for underpayment—in other words, retroactive pay is the difference between what was paid and what should have been paid.
For example, if an employee was paid for all of the hours they worked, but paid the incorrect wage, the discrepancy would be retroactive pay. If, however, they received no pay for some hours or no overtime for hours that qualified as overtime, that discrepancy would be considered back pay.
We should also point out that some make no distinction between back pay and retroactive pay, so this isn’t a strictly defined or regulated term.
In addition to the examples of unpaid hourly wages above, some examples of back pay include:
Unpaid bonus money due to an error in calculating company earnings
Unpaid commission resulting from an error in recording sales
Unpaid wages for work performed under an illegal commission-only arrangement
Unpaid wages from a final pay period after an employee resigns or is terminated
The following examples are either retroactive pay or additional examples of back pay, depending on whether or not you make a distinction between the two terms:
Additional pay owed for a wage increase that was not applied at the correct time
Pay owed for overtime that was paid using an incorrect formula or based on an incorrect base hourly wage
Pay owed for a retroactive salary increase
Failure to pay the proper wages for work performed is a violation of the Fair Labor Standards Act or FLSA. An employer may be sued for back pay by the affected employees or by the government itself. The act contains a number of methods by which an employee may recover back pay, namely:
Payments supervised by the Department of Labor’s Wage and Hour Division
A judgment resulting from a suit brought by the Secretary of Labor
A judgment from a private suit brought by an employee or group of employees
An injunction preventing an employer from underpaying employees after a previous violation
In the cases involving a lawsuit, back pay may be only one part of a judgment, which could also include paying legal fees, additional compensation in the form of damages, or additional penalties for the violation itself.
The FLSA includes a two-year statute of limitations on recovering back pay that increases to three years in the case of intentional or willful violations.