What is Back Pay?
Back pay is utilized when there is a discrepancy with an employee’s compensation. The actual amount is referred to as back pay – the sum of what the employee should have been paid, less the amount paid out. There are several instances where an employee may be eligible for back pay.
- Retroactive Increase. Perhaps an employee had been performing tasks above and beyond their normal job requirements to prove they were ready to take on more responsibility. The successful completion of these tasks resulted in a promotion, at which point the employer provided the employee with back pay at the new rate for the time that he or she had truly been in the new role.
- Terminations & Lay Offs. If an employee was fired or laid off and did not receive compensation they are owed and/or were fired under false pretenses, in certain circumstances they are eligible to pursue back pay. If approved in court, the company will be ordered to pay back pay and possibly damages and court costs as well.
- Incentives. Many start-ups will leverage back pay as an incentive for employees. Since these businesses generally are working with a fixed amount of capital yet seeking talent at the upper echelon of the spectrum, they need to get creative with salaries. By promising back pay under certain pretenses, the employer may get a higher quality candidate who is intimately bound to the financial success of the company. It results in a mutual benefit should the company see success.
- Error in Payroll Processing.
If there was a clerical error in processing payroll that resulted in an employee receiving less than they should have, the company will be required to provide that individual with back pay for the time the issue occurred.
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