Back pay: what it means, why it arises and how to calculate it

A pay rise is agreed in April and appears in the July payslip. An employee finds that overtime has been missing for months. A tribunal decides that someone should never have been dismissed. In each case, money is owed for a period that has already passed. That money is back pay.

This article explains the meaning of back pay, the six reasons that it arises, how to calculate it, what UK guidance says about claiming unpaid wages, how back pay is used as a legal remedy in the United States and what an employer should do when it finds that it owes some.

Backdated rises often follow a pay review. See how New Dynamics performance reviews bring goals, feedback and development into one fair discussion.

What does back pay mean?

The Cambridge Business English Dictionary defines back pay as “income that should have been paid or was expected at an earlier time”.

In practice the phrase covers two situations.

• Pay that was owed and not paid. The employee earned it, and the employer paid too little or paid late. This is the sense in most legal contexts. You will also see it called unpaid wages or arrears.
• Pay that becomes due for a past period. A pay rise, a regrading or a collective agreement is settled late and takes effect from an earlier date. British employers usually call this backdated pay. American employers often say retroactive pay.

Back paying, as a verb, simply means paying those amounts. Either way, the calculation is the same: what should have been paid, minus what was paid.

Why back pay arises: six causes

1. A payroll error. A wrong rate, a missed allowance, hours keyed incorrectly or a starter set up late.
2. A backdated pay rise. A review, a promotion or a negotiated award is agreed after its effective date.
3. Minimum wage underpayment. GOV.UK's guidance on employers and the minimum wage is blunt: “Employers who discover they've paid a worker below the correct minimum wage must pay any arrears immediately.” It gives an example in which a deduction for a uniform takes a worker's pay below the minimum.
4. Unpaid hours. Overtime, travel time, training time or work done before and after a shift that was never recorded or paid.
5. Wrong classification. A worker treated as self-employed, or an American employee wrongly treated as exempt from overtime. Our guide to exempt and non-exempt employees explains the second.
6. A legal remedy. A court, tribunal or settlement awards the pay that a person would have earned if they had not been dismissed, passed over or underpaid unlawfully.

How to calculate back pay in five steps

1. Fix the period. The date from which the correct pay should have applied, to the date on which it was corrected.
2. Work out what should have been paid in each pay period: the right rate, hours, allowances and anything that depends on them, such as overtime premiums, holiday pay and pension contributions.
3. Subtract what was paid. The difference, period by period, is the gross back pay.
4. Pay it through payroll. Back pay is earnings. It is subject to tax and the usual deductions when it is paid, so the net amount will be smaller than the gross. Check the rules with your payroll provider or tax authority.
5. Explain it. Show the amount as a separate line on the payslip, and give the employee the calculation.

A worked example. Priya's salary rises from £30,000 to £31,200 with effect from 1 April. The rise is approved late, and first appears in her July pay. Her monthly pay should have been £2,600 and was £2,500, a shortfall of £100 a month. For April, May and June she is owed 3 × £100 = £300 gross back pay, which is added to her July pay and taxed in the usual way. If her employer's pension contribution is a percentage of salary, that needs correcting too.

For how a pay run works, see our plain guide to what payroll is.

Unpaid wages in the UK: what Acas says

Acas's guidance on what to do if wages are not paid begins with the rule: “By law (Employment Rights Act 1996), employers must pay wages on an agreed pay day.”

An employer's right to take money from pay is limited too. Acas's guide to deductions from pay and wages lists the cases in which a deduction is lawful, for example where it is required by law, where the contract specifically allows it or where the worker agreed to it in writing beforehand. A deduction outside those cases can create back pay.

For a worker who thinks that they are owed money, Acas suggests this route.

• Check the amount. Use payslips, the contract, timesheets and rosters to work out what you are owed.
• Raise it informally first, with your manager, payroll or HR, and confirm the conversation in writing.
• Explain and evidence it. Show your calculations, and ask for a response within a specific time, for example “within 7 days, or before your next pay day”.
• Raise a grievance if that fails. Our guide to the meaning of grievance explains the procedure.
• Consider a tribunal claim as a last resort.

Time limits are strict. Acas states: “For claims about unpaid wages, you have 3 months minus 1 day from the date you should have been paid.” Where there has been a series of underpayments, the limit runs from the last one, and Acas says that a claim can go back up to 2 years, as long as there is less than 3 months between each underpayment or the underpayments are linked, for example by the same error.

This is a summary of Acas guidance for Great Britain. It is general information, not legal advice. If you may have a claim, check the time limit with Acas at once.

Back pay as a legal remedy in the United States

In American employment law, back pay is also a formal remedy. The US Equal Employment Opportunity Commission's page on remedies for employment discrimination explains the aim: “to put the victim of discrimination in the same position (or nearly the same) that he or she would have been if the discrimination had never occurred”.

It gives an example. If someone is not selected for a job or a promotion because of discrimination, “the remedy may include placement in the job and/or back pay and benefits the person would have received”.

Back pay can also set the size of another award. In cases of intentional age discrimination, or intentional sex-based wage discrimination under the Equal Pay Act, the EEOC says that liquidated damages may be awarded, and that the amount “is equal to the amount of back pay awarded the victim”.

Back pay is also recovered under American wage and hour law, for unpaid minimum wages and overtime. The rules and time limits vary by statute and by state. This is general information, not legal advice.

Five things an employer should do

Acas's advice to employers on handling unpaid wages can be grouped into five actions.

1. Tell people quickly, in writing. Acas says that employers should tell workers in writing as soon as possible if they cannot pay on time, or if there has been a delay or a mistake in the payroll.
2. Explain the fix. Let workers know how you are going to resolve the situation, and when.
3. Pay what is owed as soon as possible. Do not wait for the next convenient pay run if people are in difficulty.
4. Listen. Acas reminds employers that “pay can be sensitive”, and that they should offer workers the opportunity to discuss any concerns, such as financial difficulty or bank fees.
5. Consider compensation. Acas suggests that employers who cannot pay on time could consider paying any late charges that workers incur. It notes that a worker could otherwise claim for wages owed and for “any losses they have suffered as a result of non-payment or late payment”.

Then find the cause. One underpayment is a mistake. The same underpayment for twenty people is a process fault.

How to avoid owing back pay

• Set effective dates that payroll can meet. Approve pay rises before the payroll cut-off for the month in which they start.
• Check minimum wage after every change to rates, hours, deductions or salary sacrifice. Acas notes that a salary sacrifice must not take pay below the National Minimum Wage.
• Record all working time, including training, travel between sites and handovers.
• Review classifications when roles change.
• Reconcile payroll each month, and investigate every unexplained difference.
• Make it easy to query pay. People who can ask a simple question early rarely need a grievance.

A clear compensation policy, with fixed review dates, removes one common cause, which is a rise agreed late.

Common mistakes

Paying net differences by hand. Back pay belongs in payroll, with tax and pension handled properly.

Forgetting what depends on basic pay. Overtime rates, holiday pay and pension contributions may all need correcting.

Correcting one person quietly. If the error is systematic, fix it for everyone affected.

Arguing about small sums. The cost to trust is far greater than the amount.

Silence. People find out about pay errors. They should hear it from you first.

Waiting. Time limits are short for the employee, and delay looks like bad faith in the employer.

Frequently asked questions

What does back pay mean?

Back pay is income that should have been paid at an earlier time. It includes wages that were underpaid or paid late, and the amounts that become due when a pay rise is backdated to an earlier effective date.

What is the difference between back pay and retroactive pay?

The terms overlap. Back pay usually means wages that were owed for past work and not paid. Retroactive or backdated pay usually means the extra amount due when a pay rise takes effect from an earlier date. Both are calculated as what should have been paid minus what was paid.

How do you calculate back pay?

Fix the period, work out what should have been paid in each pay period, subtract what was actually paid and add up the differences. For example, a rise of £100 a month that is three months late gives £300 gross back pay.

Is back pay taxed?

Back pay is earnings, so it is normally subject to tax and the usual deductions when it is paid through payroll. The net amount will be less than the gross. Check the rules with your payroll provider or tax authority, because they differ between countries.

How far back can you claim unpaid wages in the UK?

Acas says that you have 3 months minus 1 day from the date you should have been paid to make an employment tribunal claim. For a linked series of underpayments, the limit runs from the last one, and a claim can go back up to 2 years.

What should I do if my employer owes me back pay?

Work out the amount from your payslips, contract and timesheets. Raise it informally with your manager, payroll or HR, and confirm it in writing with your calculation. If that fails, raise a grievance. Check tribunal time limits with Acas early, because they are strict.

Your next step: check one thing this month

1. Pick last month's payroll changes: rises, new starters and changes of hours.
2. For each, compare the effective date with the first payslip that showed the change.
3. Where there is a gap, check that back pay was calculated, paid and explained.

For a clear approach to pay reviews and effective dates, read and download our compensation policy guide. The guide is free to read, and the PDF uses our short download form.

Want pay reviews to rest on goals, feedback and fair discussion, and to finish on time? Book a New Dynamics demo and bring your current approach. You can also email contact@new-dynamics.com.