Understanding back pay
Do you remember the first time you left a job? Unless you are a new worker who has not experienced saying goodbye to a role, you would know that leaving a job involves more than gathering your things, preparing to hand over, and bidding your work pals farewell.
Be it of your own volition – such as resigning to grab a better opportunity or job offer – or being wrongfully terminated from your workplace, you left your job for a compelling reason. And no matter what that reason is, you might be able to receive back pay.
But what exactly does back pay mean, and how can you properly calculate it? This article is your complete guide to understanding back pay. In it, we will discuss the following:
What is back pay?
The Department of Labor and Employment (DOLE) defines back pay as the total amount of wages and monetary benefits a former employee should receive from a previous employer regardless of the reason for the separation or termination from work.
In accordance with the Labor Code of the Philippines, the DOLE released the Labor Advisory No. 6 Series of 2020, which outlines the payment of final pay or last pay. Last pay is another term the agency uses to refer to back pay. According to the guidelines, the calculation of final pay includes but is not limited to:
- any unpaid salary the employee already earned
- cash conversions of any remaining unused leave, including vacation leave, sick leave, and other types of leave depending on workplace policy and the agreement between the employer and employee
- pro-rated 13th-month pay
- the cash conversion of unused service incentive leave, following Article 95 of the Labor Code
- separation pay, as per Articles 298–299 of the Labor Code
- retirement pay, if applicable, following Article 302 of the Labor Code
- income tax claim for the excess of taxes withheld, if applicable
- other remaining compensation included in the employee's agreement with the workplace
- cash bonds or any form of deposits the employer should return to the employee upon termination.
If it is your first time leaving a job, you might be curious about the period in which you will receive your final pay after your resignation or termination. According to the same guidelines from the DOLE, employees should receive final pay within 30 days of their separation or termination from work. This guideline applies unless the employer's company policy provides better conditions for the employee.
Another definition of back pay is the payment for work that an employee has already performed but the employer has not yet paid – in short, unpaid wages. An example of this is if you worked overtime but your employer denied overtime pay for the work.
Speaking of definitions, here is a clarification on a different type of employee benefit that people often connect, if not confuse, with back pay: retroactive pay.
Back pay is the final amount of wages and cash benefits that an employee is due upon separation or termination from work or the unpaid wages an employee should have received for work they completed. Retroactive pay, or retro pay, is additional pay based on the difference between what an employee should have received for work they completed and what they received.
Let us again use the example of overtime wages not paid. Back pay would refer to the overtime wages not paid despite the employee completing overtime work, while retroactive pay is additional pay due to the employee because they received a lower amount than they should have for the overtime work they performed.
Reasons you may get back pay
There is no specific law that makes back pay or final pay mandatory. The case is different for separation pay. The DOLE provided the guidelines we discussed earlier to streamline the payment of final pay to employees who have left their jobs.
If you are wondering about other reasons an employer may owe an employee back pay besides leaving their job, some of them include:
Misclassification of an employee
There are various kinds of employment, each with its own merits, limits, wages, and benefits. According to the Labor Code of the Philippines, employee classifications include probationary, casual, fixed-term, project, seasonal, and regular. Misclassified employees may not receive their full benefits or even the right wage, making them eligible for back pay.
Payroll errors
If an employee discovers a discrepancy due to an honest payment error, they may be eligible for back pay. An example of this is when the employer pays an employee minimum wage, despite their contract stating that they should receive higher pay.
Retroactive pay increases
Let us say you recently received a promotion to a managerial role with higher pay. The payment you received for your first month in the managerial role is the same amount that you used to receive in your previous role. The difference between what you received and what you should have received for your new role is the back pay that your employer owes you.
Calculating back pay
Before resigning from your job, having an idea about how to calculate back pay can help you better prepare for the next step in your career. Assuming you are a regular employee, here are some employee benefits that may factor into your back-pay calculation:
Unpaid salary
To calculate your unpaid salary, first work out your daily rate. To do this, multiply your basic monthly income by 12 (months in a year), then divide that amount by 260 (workdays in a year, assuming you work five days a week). The answer is your daily rate.
Let us provide a sample back pay computation. Say your employer pays you twice a month, on the 15th and the 30th, and your gross monthly pay is ₱15,000. Your last day of work is November 10th, 2023.
If you multiply ₱15,000 by 12, you get ₱180,000. This is your annual pay. Next, divide ₱180,000 by 260, and you get ₱692.31, your daily rate.
Now, to calculate your unpaid salary, multiply your daily rate by the number of workdays since your last payment. In our example, you will multiply ₱692.31 by 9 (workdays), which gives you ₱6,230.79.
Pro-rated 13th-month pay
To calculate this payment, multiply your basic monthly income by the number of months you have worked throughout the year and then divide that amount by 12 (months in a year).
Going back to our example, let us say you have worked in your current role for seven months of the year. Multiply your monthly income of ₱15,000 by 7 to get ₱105,000. Then, divide ₱105,000 by 12, which will give you a pro-rated amount of ₱8,750.
Leave conversions
To calculate your leave conversion, multiply your daily rate by the number of unused leave days that you can convert to cash. Let us say you still have five unused convertible leave days. Multiply your daily rate of ₱692.31 by 5 to get ₱3,461.55, the leave conversion your employer owes for unused leave.
Tax Refund
This refers to withheld taxes above what you should have paid for the year. For simplicity, let us say your excess tax withheld in the year is ₱250. Once you have worked out these amounts, add them together to get your total back pay. In our example, an employee whose gross pay each month is ₱15,000, who has worked for seven months in the year, and who has five unused leave days may get a total back pay of ₱22,846.20.
Note that these are not all the benefits that may contribute to your back-pay calculation. Depending on your employment contract, you may also need to include retirement pay, separation pay, cash bonds, and other monetary benefits.
Also, remember that your workplace may apply deductions depending on how your employer calculates your pay. These may include deductions for mandated government contributions, absences, tardiness, loans, and other liabilities that your employer deducts from your salary.
Examples of back pay
To give you a better idea of the different scenarios where you may be eligible for back pay, here are some more examples based on types of employment:
- Salaried employee: Your workplace owes you back pay if you resign, or your employer terminates your employment. You may also receive backpay if you received a promotion but did not receive the increased wages and benefits that come with it.
- Hourly wages: For hourly workers, you may be due back pay if you have worked outside work hours but have unpaid overtime.
- Commissions: If you earn commission in your role, you may receive back pay from your employer if you have any commission that remains unpaid because of an error on your employer's end. An example is if your employer did not include some of your sales records in their calculation of your compensation.
- Bonuses: Back pay also covers bonuses. If you are due to get a bonus but you did not receive it because of a mistake, you may receive your bonus as back pay.
Conclusion
Backpay is the total sum of the wages and other benefits that you should receive from your workplace upon your separation or termination from work. It also covers any payment that you should have received but did not for work that you already performed. Whichever of these two scenarios applies to you, understanding back pay and how to calculate it ensures that you receive what is correctly due to you at work. The backpay you will get can help you plan for your next career move.
FAQs
- What is the process for calculating back pay?
To calculate back pay, add your unpaid salary for the year, pro-rated 12-month pay, leave conversions, and tax refund for excess taxes withheld, if any.
Consider this will not include your usual monthly deductions. These deductions may include mandated government contributions, deductions for loan payments, and any penalties for absences or tardiness. - How do I ask for backpay?
Upon your resignation or termination, speak to your workplace's human resources department to find out if there are any instructions and clarifications they may have regarding your back pay. You may also inform them of your preferred mode of payment for your back pay.
Also, make sure to complete your clearance form. This facilitates the release of your back pay. - When can I get backpay paid?
According to the DOLE Labor Advisory series and the labor code, a former employee must receive their back pay no more than 30 days after their separation or termination from work. If your employer has a more favorable company policy or you have a better agreement with your workplace regarding this, that policy/agreement will apply. - Is back pay taxed?
Yes, taxes apply to your back pay based on the TRAIN Act. The payable tax on your backpay is based on the tax rate of your net taxable income. - Can back pay be withheld?
Final pay or back pay is not mandatory in the Philippines. The DOLE Labor Advisory series is the only guidance on streamlining the payment of final pay to departing employees. Therefore, it is crucial to go through your employment contract and check with human resources if your employer owes you backpay. - Is there a process in resolving back-pay disputes?
If you think your employer owes you backpay, reach out to human resources to discuss your employment contract. If you still do not receive your back pay despite knowing you are entitled to it, you can file a case with the Department of Labor and Employment or the National Labor Relations Commission. - What documentation should I keep for a back-pay claim?
Maintaining your records of employment contributes to the success of back-pay claims. These records include your contract, pay slips, BIR form, time records, and any official document/s relevant to your employment and company policy.
