How To Calculate Back Pay (With Definition and Examples)

By Indeed Editorial Team

Published 2 August 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Understanding how to calculate wages is important to ensure employees receive the proper compensation. Employees may request adjustments to their pay if they believe a company didn't accurately compensate them for the wages they earned. Learning how to determine what to pay an employee in this circumstance can help you resolve the situation. In this article, we define what back pay is, share the differences between it and retroactive pay and explain how to calculate back wages for hourly and salary employees.

What is back pay?

Back pay refers to the remaining amount of money that a company owes you after you've received your paycheck. Sometimes, you earn this after receiving a salary increase that took time to be processed by your company's payroll system. You can also be eligible for additional pay if you received less money than you earned or if your payroll manager forgot to include your overtime pay in your timesheet. You may also request this type of pay if you believe you were wrongfully terminated from your position.

Related: How to Negotiate Your Salary During COVID-19

What is the difference between back pay and retroactive pay?

Back pay is the wages that a company still needs to pay to the employee. Retroactive pay is the difference between what a business should pay the employee versus what they earned. Retroactive pay could rectify errors such as a payroll mistake, an unpaid raise to an employee or a miscalculation of an employee's wages compared to previous payments they've received.

Does an employer have to compensate back wages?

If your employer made a mistake on your payroll, they must repay the full amount they owe you. Employers may also have to pay you to honour a contractual obligation upon your termination.

Companies may purchase liability insurance to protect themselves against certain claims. In this case, if you make a successful claim for additional compensation, the insurance provider may pay the amount your employer owes you. The amount of time it takes an insurance provider to complete the claims process typically depends on the complexity of your case. While the insurance provider may resolve your claim quickly, there are some cases that may take a few years to settle.

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Who can receive back wages?

There are many reasons why you might receive additional compensation. Some of the most popular reasons are if you:

Are unable to finish the job

If your employer prevented you from finishing a job without a valid reason, you may be eligible for additional compensation. For instance, if your employer ends your contract unlawfully, you may receive back wages for the hours or days they didn't allow you to work. This can help people financially support themselves while they apply for new jobs.

Transition from hourly to salary employment

If your employer changes your contract from an hourly rate to a fixed wage or vice versa, you may receive additional pay from your company based on your prior status of employment. For example, if you worked overtime as an hourly employee before transitioning to a salaried employee, you might realise you would have made more money on your last paycheck if your employer paid you for your overtime hours. Depending on the exact date you became a salaried employee, you may be able to request additional pay from your company to cover these overtime hours.

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Receive less than the minimum salary

Another common reason you may receive back wages is if your employer doesn't pay you the minimum wage. Hong Kong's Minimum Wage Ordinance establishes a Statutory Minimum Wage (SMW) to sustain the country's economic competitiveness and growth. As of today, the SMW rate is HK$37.5 per hour.

Are terminated without cause

You may also be eligible to receive additional pay after an unwarranted termination. You can calculate the amount of back wages you may receive by determining how much money you would typically earn between the date of your termination and the date that your claim was finalised. For instance, if your employer terminated you unjustly on July 1, 2021, you might have filed a claim against them. If you win the case on December 1, 2021, the court may require your employer to reinstate you and compensate you for about four months of lost wages.

Related: Write a Convincing Salary Increase Letter in Six Simple Steps

How to calculate back wages

The way you calculate back wages depends on whether you're an hourly or a salaried employee:

Calculating back wages for hourly employees

If your contract includes overtime pay and your employer hasn't compensated you for the overtime you've accumulated, you may request back wages. Here's how you can determine how much your employer owes you:

1. Calculate your hourly rate

Take your total pay for the weeks you worked and divide it by the number of hours you worked to determine your regular hourly rate for the week. You can use the following formula:

Total pay / Total number of hours worked = Regular hourly rate

For example, if you received HK$17,000 after working 160 hours during your monthly pay period, your regular hourly rate would be HK$106.25 per hour.

2. Calculate your half-time rate

To calculate the half-time rate your employer owes you for each hour worked over the maximum 40-hour limit stated in your contract, divide your regular hourly rate by two. You can use the formula below:

(Hourly rate) / (2) = Half-time rate

For example, if your regular hourly rate is HK$106.25, you can divide this by two to get your half-time rate of HK$53.13.

3. Calculate the amount of overtime pay

After determining your half-time rate, make sure you multiply it by the number of overtime hours you've worked during the week. You can use the formula below:

(Half-time rate) X (Overtime hours) = Overtime Pay

For example, if your half-time rate is HK$53.13 and you've worked 10 hours overtime in one week, you would be eligible to receive an additional HK$531.30 on your next paycheck.

4. Calculate your unpaid overtime

Once you've determined the amount of overtime pay you're entitled to receive, multiply it by the number of weeks you've worked without getting overtime pay.

(Number of weeks worked) x (Half-time rate) = Back wages

For example, if you've consistently worked 10 overtime hours each week for the last month without being compensated for it, your employer owes you HK$2,125.20.

Calculating back wages for salaried employees

If you're a salaried employee, here are the steps you can take to calculate your back wages:

1. Determine your original annual salary and your new salary

Determine the salary you made last year and your new salary. For example, say you're a full-time project manager and your salary last year was HK$200,000. If you earned a 15% raise, your current salary would be HK$230,000 per year.

2. Note the number of pay periods

Determine when your new pay raise increase goes into effect and how often you get paid. For example, you may receive a monthly paycheck. If you earn a raise starting July 7, your new pay rate may apply to the last three weeks of the month.

3. Divide your previous annual salary by the number of pay periods

Divide your previous annual salary by the number of your pay periods. If you're paid monthly, divide your salary by 12. You can use the formula below:

(Previous annual salary) / (Number of pay periods) = Average paycheck

For example, if you made HK$200,000 last year and you receive payment monthly, you would earn about HK$16,666.66 per paycheck.

4. Divide your new annual salary by the number of your pay periods

Next, divide your new salary by the same number of pay periods.

(New annual salary) / (Number of pay periods) = Average paycheck

For example, say you make HK$230,000 per year after your 15% raise and you receive payment monthly, you would earn about HK$19,166.66 per paycheck.

5. Subtract your total

Subtract the amount you previously made per pay period from the amount you earn per pay period now to determine the difference in your monthly pay.

(New paycheck amount) - (Previous paycheck amount) = Pay difference
For example, if you currently make HK$19,166.66 per paycheck and you previously made HK$16,666.66 per paycheck, you earn an average of HK$2,500 more per month now.

6. Multiply the difference by the number of pay periods

After identifying the difference in your monthly pay, multiply it by the number of months your employer accidentally paid you at your previous rate after you earned your raise. You can use the formula below:

(Difference in monthly pay) X (Number of pay periods) = Total back wages.

For example, if you received your raise three months ago, but your employer accidentally didn't update payroll, you could multiply the difference in monthly pay by three pay periods. If you're supposed to earn an additional HK$2,500 per month with your raise, your employer would owe you HK$7,500 in back wages.

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