What is back pay? A guide for HR and payroll teams

Everyone deserves to be paid correctly for the time they work. When this hasn’t happened, understanding the ins and outs of back pay can protect a business’s cash flow and boost employee morale.

In this article, we look at what back pay is, when employees can claim it and how to calculate it (with examples).

Here’s what we cover:

What is back pay?

Back pay, also called back wages or back salary, is the difference between the amount of money an employee has been paid and the amount they are entitled to receive.

If you have underpaid an employee, there are certain HR and payroll processes you must follow to ensure they receive the money they’re owed.

When can employees claim back pay?

Errors in back pay can happen for many reasons.

Everyone makes mistakes, so some back pay issues might occur due to human error, for example, when an employee’s status has been misclassified.

However, there are times when employers intentionally withhold pay.

When it comes to dealing with salary back pay, employees can claim pay in the following situations:

• They changed from an hourly worker to a salaried employee. If an employee switches from receiving hourly wages to earning a salary, you may owe them back wages. This is also the case if it’s the other way around, if the salaried employee moves to hourly pay.
• Where a task couldn’t be completed. If an employee is unfairly prevented from completing a project, they may be owed back wages. For example, if a manager removes an employee from an assigned task without a valid reason, the employee could receive back pay for the time they couldn’t work.
• They’ve been wrongfully dismissed. If an employee wins an action for wrongful dismissal, the employer may have to pay back wages. The exact amount of back salary is determined by the legal body that made the wrongful dismissal ruling.
• Where an employee has not been paid the National Minimum Wage. It’s a legal requirement to pay workers the minimum wage. If the minimum wage increases and employees’ pay don’t reflect the changes, you must pay back wages to cover the amount owed.
• Pay for a previous wage increase. Employees may be entitled to back pay if they were supposed to receive a higher wage but the new contract was delayed.
• For unpaid overtime. If an employee worked overtime but it wasn’t recorded on their timesheet, you must pay back wages for the extra hours.

Do employers have to pay back pay?

Yes, employers are required to pay back wages. Whether the error in pay happened accidentally or intentionally, the law is clear that employees must receive all the pay they are owed.

Employees can take legal action if employers fail to pay the necessary back pay, as this is considered a breach of contract.

If the employee is successful in their legal action against an employer for back pay, the employer will not only be required to pay the owed salary but may also face fines from HMRC for falling foul of employment laws.

How does back pay appear on a payslip?

Employees should be able to clearly identify back wages on their payslip.

Payroll teams must ensure that back pay is listed as a separate line item.

Back wages should be described clearly, for example, terms such as back pay or pay adjustment can be used. The period that the back pay covers must also be specified.

The payslip should also show the gross amount of back pay before tax and National Insurance contributions (NICs) are deducted.

As tax and NICs are deducted from back pay, these deductions will also appear on the payslip, either in the regular section or separately.

Lastly, the back pay with the relevant tax and NICs could affect the year-to-date (YTD) totals shown on the payslip. The YTD figures for gross pay, tax and NICs need to be updated to include back wages.

Here’s an example of how back pay appears on a payslip:

Description	Amount
Basic Pay	£2,000.00
Back Pay – Jan 2025	£200.00
Tax	-£300.00
National Insurance	-£150.00
Net Pay	£1,750.00
Year to Date Gross Pay	£20,200.00
Year to Date Tax	£3,000.00
Year to Date NI	£1,500.00

So now, if your employees ask, “What is back pay on my payslip?”, or new starters ask, “What is back pay on my first payslip?”, you’ll be able to answer them with confidence.

How to calculate back pay

Take the following steps before calculating back wages:

Use reliable payroll software to ensure that you have the correct pay rates for all employees.

Get moving as soon as possible. When you realise that back pay is due, take immediate steps to include the money owed in the employee’s next pay.

Keep employees informed about what is happening with their back pay. Clear communication helps to reduce any tension around the issue of back wages.

Employees should clearly understand the reasons for back pay, the amount they will receive and when they will be paid.

Take a business-wide approach. Make sure you cover all your bases when calculating back pay, by involving different departments in the process, for example, legal and accounts.

How to calculate back pay for salaried employees

Follow these two steps:

1. Work out the pay periods the employee has in a year.
2. Take their total salary and divide it based on how many times they get paid.

Here is an example of how back pay for employees works.

David earns £36,000 per year after tax. He gets paid 12 times a year, so that’s once every month.

Each month, he will earn £3,000.

David worked five extra hours every week for a whole month.

First, you divide his monthly pay by four (there are about four weeks in a month): £3,000 divided by four equals £750 per week.

Then, you divide his weekly pay by five (he works five days a week): £750 divided by five equals £150 per day.

Since he works seven hours each day, you divide his daily pay by seven: £150 divided by seven is £21.43 per hour.

If you don’t count any extra overtime pay, you multiply his hourly rate by 20 (five overtime hours a week for four weeks): £21.43 x 20 = £428.60.

Now, let’s say David gets extra pay for overtime, such as his hourly rate plus half. That means his overtime hourly rate is £21.43 plus half of that (£10.72), which is £32.15 per hour.

If you multiply that overtime rate by 20 again, you get £643.00.

So, the total back pay for his overtime would be £643.00.

How to calculate back pay for hourly workers

Follow these two steps:

1. Find out how many hours the employee worked, then calculate the hours the employee needs to receive in back wages.
2. Multiply this number by how much they make per hour.

Here is an example of how to work out back pay for hourly employees.

Sarah earns £1,500 each month. That means her yearly pay is £18,000 (monthly pay times 12).

If there are four weeks in a month, her daily pay is £75 (20 working days in the month).

If she works seven hours each day, her hourly pay is about £10.71 (daily pay divided by hours worked per day).

Sarah worked an extra hour every day for a week. That’s 1 hour x 5 days, which is five extra hours that week.

Next, we multiply those five hours by her hourly pay: 5 hours x £10.71 = £53.55.

Then, you need to know if overtime is paid the same or more.

Let’s say overtime is her hourly rate plus half. Her overtime rate would be £10.71 plus half of that (£5.36), which is £16.07.

Multiply that by the overtime worked (five hours) and you get £80.35. This is how much extra Sarah should get paid in back pay.

Final thoughts

Although employers may do their best to ensure that employees receive the correct pay, mistakes or delays can still happen.

Whether back pay becomes a contentious issue depends on how it’s managed. Keeping employees in the loop and getting the money owed to them as soon as possible can make a big difference.

The right payroll software should minimise the risk of underpaying employees by accurately calculating wages.

However, if an employee is owed money due to human error, your payroll software should help you to simplify the process of managing back pay.

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