Managing people

Are you entitled to back-pay?

Are former employees entitled to back-pay if a wage rise in a new agreement backdates to when they were still employed? Learn about back-pay entitlements here.

‘Back-pay’ generally refers to two different circumstances. First, it may be a reference to a payment due to an employee as a result of non-payment or underpayment of an entitlement. This usually arises from a misinterpretation of a modern award or an enterprise agreement, an employer being unaware of a pay change in a modern award or an error in wage or salary administration in the payroll system. Second, this term may refer to a salary or wage payment arising from a tribunal order to back date a new level of pay.

Consider this example

A company negotiates a new enterprise agreement which is approved by the Fair Work Commission on March 1. The new agreement contains a pay rise of 2.5 per cent which is operative from the first pay period commencing on or after 1 January. Two employees who would have been covered by the new enterprise agreement resigned from the company in February, but before the agreement had been approved.

Are the employees who left the organisation before the agreement was approved entitled to back-pay?

The answer is yes. Although not a breach of the enterprise agreement at the time, a former employee would be able to claim for any back-dated wage increase ratified subsequent to the date of termination. As a general rule, an employee is entitled to be forwarded any monies earned during their employment, subject to complying with the relevant criteria for payment, regardless of the worker's employment relationship with the employer.

Termination payments

Any change to an employee’s ordinary rate of pay which is backdated may also affect termination payments. In the case of pro rata annual leave, the Fair Work Act (s90(2)) provides that if, when employment ends, an employee has a period of unpaid paid annual leave, an employer must pay the employee the amount that would have been payable had the employee taken the leave.

This means the employee’s ordinary rate of pay at the date of termination. Consequently, an adjustment to a pro rata annual leave payment the employee received upon termination of employment would be required.

 Similarly, with long service leave (where relevant), generally Commonwealth, state or territory long service leave legislation requires an employer to pay pro rata long service leave at an employee’s ordinary rate of pay that applied at the date of termination. An adjustment to the pro rata long service leave payment on termination would be required to be made by the employer.

What if employee cannot be located?

As the most common method of payment of wages is by electronic funds transfer it should be relatively easy to forward back-pay to an employee.

But what happens if an employee has closed their account with a financial institution?

 Employers are often uncertain as to their legal position regarding wages or monies owed to employees, where the rightful owner appears to have lost interest or makes no claim. This may also occur when payments for outstanding wages and entitlements are forwarded to the Fair Work Ombudsman as a result of a workplace investigation by that authority.

 Under the Fair Work Act (s559), any outstanding wages or entitlements that are payable to an employee that relate to the National Employment Standards – and any wages and entitlements due under the applicable modern award or enterprise agreement – must be forwarded to the Fair Work Ombudsman (on behalf of the Commonwealth).

The Fair Work Ombudsman has a facility whereby a former employee can search a database to determine whether outstanding monies have been forwarded to the Commonwealth.

Employers can pay unclaimed monies owed to employees to the Fair Work Ombudsman in situations where the employee cannot be located. Interest is paid on unclaimed monies in excess of $100 that have been held by the Ombudsman for at least six months.

The bottom line: An employee is entitled to back-pay for any retrospective adjustment in their wages even when the variation occurs after the date of termination of employment.

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