Back pay

Employers are required to pay employees accurately and promptly. When they don’t, their workers may be entitled to back pay. And depending on the circumstances of the underpayment, there’s a risk of a lawsuit or other enforcement action. Understanding back pay and how to address it can help employers manage their risk.

What is back pay?

Back pay is payment for work done in the past where payment was not made at the time work was performed. The employer must make up the difference between what the employees were paid, if they were paid, and what they should have been paid. The concept of back pay is close but not identical to the concept of retroactive pay.

When can employers issue back pay?

Some of the common reasons for employers to issue back pay or retroactive pay are:

• Worker misclassifications (i.e., classifying employees as independent contractors)
• Accounting or payroll calculation errors
• Retroactive pay increases
• Failure to pay the required minimum wage
• Failure to pay required overtime wages

Can employers withhold back wages?

If an employee is owed money, the employer is required to pay them what they owe. Sometimes, this means simply compensating the employee for the unpaid wages. If the employee files a lawsuit, however, the employer may also have to pay various damages, lawyer fees, and court costs. Employers can face penalties from provincial, territorial, or federal authorities for not issuing back pay. Penalties vary by province or territory, as applicable.

Addressing back pay requests

Before issuing a payment to correct a prior compensation error, employers should review relevant records (i.e., timecards, payroll reports, employment contracts, employee handbooks, etc.) to verify that the employee is eligible for back pay and confirm the amount due. Employers may also want to consult with legal counsel so that any back payments to employees are made in a way that manages their legal risk.

Manage payroll effectively

Business owners can minimize making back payments by processing payroll more accurately. One way to accomplish that is with payroll software that can automate the payroll process. This feature helps employees receive compensation on time and may reduce error-prone data entry. Most payroll management systems can also integrate with time tracking tools for wage and hour calculation.

Learn More

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This guide is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.