All employees have the right to be paid correctly and fairly for the work they have performed. Back pay refers to a payment made by an employer to an employee to compensate them for wages they were not initially paid, often due to an error in calculating their pay.
This article provides a comprehensive overview of how back pay works in New Zealand, including its meaning, common reasons for its occurrence, and the rights of employees and responsibilities of employers.
What is back pay?
Back pay is compensation paid to employees for wages they earned but did not receive. This can happen for various reasons such as errors in calculating wages, overtime, or holiday pay.
Why do employees get back pay?
There are several reasons an employee might receive back pay. Here are some common scenarios:
- Miscalculations in pay- Errors in calculating minimum wage, overtime pay, holiday pay, allowances, or deductions can lead to underpayment.
- Changes in employment agreements - If an employee's role or responsibilities change, their pay rate may need to be adjusted retroactively.
- Administrative errors - Payroll mistakes, such as missing timesheets or incorrect leave calculations, can result in underpayment.
- Minimum wage increases - If an employee was not paid the current and accurate minimum wage for the hours they worked, back pay may be necessary to account for the difference.
- Minimum wage violations- If an employee was not paid the national minimum wage for the hours they worked, back pay may be necessary.
- Unpaid overtime - If an employee has worked approved overtime hours and they were not compensated adequately, they may be entitled to back pay.
Do employers have to make back payments?
Under New Zealand employment law, employers are legally obligated to back pay underpaid employees. This includes any unpaid wages, overtime pay, on-call pay, holiday pay, or allowances.
The following are resources that protect an employee’s right to back pay:
- Employment Relations Act 2000
- Minimum Wage Act 1983
- Wages Protection Act 1983
- Holidays Act 2003
- Common Law
- Employment agreements
Avoiding underpayment
Both employers can take steps to prevent underpayment and the need for back pay.
Employers should ensure that they are familiar with employment legislation and minimum wage regulations. Here are some ways in which employers can ensure they’re compliant:
- Review wages regularly: Check employee wages against agreements, and the applicable minimum wage.
- Stay updated: Be aware of annual minimum wage adjustments (typically 1 April)
- Promotions and qualifications: Review pay as employees gain experience, train, or are promoted.
- Starting out wage and training wage: These would need adjustment due to age, service time, or completion of apprenticeship.
- Keep accurate records: Maintain timesheets, pay records, and employment agreements for verification.
Calculating back pay
The method for calculating back pay depends on the reason for the underpayment. Here are some common examples of back pay scenarios:
- Minimum wage underpayment: Calculate the difference between the minimum wage and the amount already paid for the hours worked.
- Unpaid overtime: Identify the number of unpaid overtime hours and calculate the overtime pay rate based on the employee’s normal hourly wages. Multiply these figures to determine the additional pay owed.
- Holiday pay underpayment: Determine the specific type of underpayment (e.g., annual leave, sick leave) and calculate the amount owed based on the relevant legislative provisions.
Pay slips and record-keeping
Pay slips and payroll records can be useful in investigating back pay claims.
Employers are legally required to maintain accurate records of wages; time worked and leave entitlements. These documents detail gross pay, deductions, and net pay. They provide a record of how an employee’s wages were calculated.
Setting up back pay
Once the employer determines that the employee has been underpaid and is owed back pay, the employer needs to rectify the error. The back pay amount should be calculated, including any overtime or allowances owed. Once the employer has worked out the exact back pay amount, the employer can include it in the employee’s next pay.
Manage back pay effectively with Peninsula
We have worked with thousands of businesses in New Zealand on matters of payments, leave entitlements, and back pay. Peninsula has a range of resources, tools, guides, and factsheets available for business owners and employers trying to navigate the complexities of back pay. Call our advice line on 0800 521 593 for more information.
This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.
Have a question?
Have a question that hasn't been answered? Fill in the form below and one of our experts will contact you back.