What Is the Definition of Back Pay?

The FLSA requires “prompt” payment of wages, which courts have interpreted to mean by the next regularly scheduled payday. Also, in most states, employers must pay wages by the state-mandated deadline. If you fail to pay wages due, it means you owe the employee back pay.

According to the DOL, in 2019, the agency collected a record high of $322 million in back wages. So, it’s in every employer’s best interest to know about back pay.

What is back pay?

Back pay is missed wages. Put another way, back pay is wages that should have been paid but weren’t. For instance, you would owe back pay for unpaid:

• Regular hours worked
• Overtime hours worked
• Salary
• Commissions
• Bonuses
• PTO, such as paid vacation or sick leave

A typical example of back pay is final wages that weren’t paid to the terminated employee.

Missed wages can stem from various reasons, such as you forgot to pay the employee or the paperwork fell through the cracks. Regardless of why it happened, if you owe back wages, you should pay it promptly to avoid the issue escalating into a legal nightmare.

When owed back pay, the employee has the law on their side

• They can file a complaint with the U.S. Department of Labor. The DOL will then look into the matter, which means you will be subject to an investigation/audit. This is the last thing you want, because it’s not uncommon for DOL audits to uncover wage-and-hour violations that have nothing to do with the current allegation. If the investigation shows that you owe back pay, the DOL will supervise the payment of those wages.
• The Secretary of Labor can sue you by filing a lawsuit. In this case, you could be ordered to pay the employee back wages and liquidated damages. For intentional FLSA violations, liquidated damages can be as much as twice the amount of back pay.
• Rather than going through the DOL, the employee can file their own lawsuit. If they prevail in court, you could be held liable for back wages, liquidated damages, court costs, and attorney’s fees.

In many states, employees can go through the state labor department to recover unpaid wages.

Back pay for discrimination or wrongful termination

This can happen, for example, if an employee proves in court that you discriminated against them when you denied them a promotion. The court can demand that you pay the difference between what the employee would have received in the higher role and what they received in the lower role.

If the back pay arose from wrongful termination, you may be liable for salary and benefits the employee would have gotten hadn’t they been wrongfully terminated.

How to pay and report back wages

To pay back wages, you can run a separate payroll for the back pay or include the back wages in the employee’s next regular paycheck. You must withhold federal taxes (for example, Social Security tax, Medicare tax, and federal income tax) plus applicable state and local taxes from back pay.

Note that the IRS considers back pay to be supplemental wages. Therefore, how you withhold federal income tax from back pay depends on how you made the payment. You must also comply with applicable state tax laws pertaining to supplemental wages.

When reporting back pay, remember that the IRS treats back pay “as wages in the year paid.” So, if you pay back wages in 2020, you must include the amount in the employee’s 2020 Form W-2 wages — regardless of which year the payment actually represents. For more details on reporting back pay, see IRS Publication 957 or speak with a payroll advisor.