Back Pay and Form W-2
Back pay, or back wages, is the difference between what an employee was actually paid and what should have been paid. Maybe you inadvertently made a payroll mistake, but regardless of how the situation was created, you should know that there are several recourses available to your employee. You have to make it right, and make sure the Form W-2 reflects any change.
Back Pay Recovery Under the Fair Labor Standards Act
If an FLSA-covered employee was paid less than the federal minimum wage or overtime rate, he or she can file a complaint with the U.S. Department of Labor to recover back wages.
When a wage claim is filed through the DOL, the agency launches an investigation and supervises the payment of wages due under the FLSA. If appropriate, the DOL will bring a lawsuit against the employer for back wages, an equal amount of liquidated damages, and civil money penalties.
If the employer is found to have intentionally broken the law, criminal penalties — including fines and imprisonment — may apply.
Note that if the wages are not regulated by the FLSA, the employee cannot recover them through the DOL. For instance, vacation, holiday, severance and sick pay; fringe benefits; and premium pay weekend or holiday hours cannot be recouped through the DOL, as they are not governed by the FLSA.
The employee can file a private lawsuit for back wages, liquidated damages, and attorney fees and court costs. However, the employee cannot file a lawsuit if he or she has already received back wages resulting from the DOL's intervention, whether through supervision or litigation. The employee also cannot file a private lawsuit if the DOL has already initiated a lawsuit for back wages on his or her behalf.
Many states have remedies in place for employees to claim unpaid wages, including state-mandated minimum wage and overtime pay, fringe benefits, and more. These claims can be filed through the state labor department.
Statute of Limitations
Under the FLSA, the employee has two years from when the wage violation occurred to file a wage claim for back wages. If the employer intentionally violated the FLSA, the employee has three years to file a claim. The statute of limitations for filing a private lawsuit or a claim with the state labor department varies by state.
Effect on Form W-2
For income tax purposes, the Internal Revenue Service treats "all back pay as wages in the year paid," even when the wages relate to an earlier tax year. For example, an employee earns $60,000 in 2018 and in that same year receives a back-pay settlement of $50,000 for the year 2015. This employee's 2018 W-2 form should reflect not only the $60,000 but also the $50,000.