Know your numbers: A complete guide to understanding back pay
Leaving a job is not just about gathering your belongings. Nor is it about handing over tasks or bidding colleagues farewell. It is rarely a simple matter. You might be leaving because you found a better opportunity elsewhere. Or you could have been wrongfully terminated. Regardless of the reason, you might be owed an unpaid financial compensation. This is known as back pay.
The significance of back pay lies in its ability to rectify financial losses. Be it unfair job loss or wage disputes. It ensures that employees are fairly compensated for their work and helps uphold their rights in the workplace.
But what exactly does back pay mean, and how can you properly calculate it? This article is your complete guide to understanding how back pay works in Malaysia.
In it, we will discuss the following:
What is back pay?
Back pay refers to the total amount of wages and monetary benefits that an employee may be owed by a former employer. This typically involves unpaid wages, wrongful termination, or other circumstances where compensation is due for work performed.
If drafted in compliance with the Employment Act 1955, every employment contract in Malaysia requires a minimum notice period of not less than:
- four weeks’ notice if the employee has been employed for less than two years on the date of notice
- six weeks’ notice if the employee has been employed for two years or more but less than five years on the date of notice
- eight weeks’ notice if the employee has been employed for five years or more on the date of notice.
This requirement applies to both employees and employers.
According to Malaysian federal law, the calculation of back pay includes:
- any unpaid salary the employee has already earned
- termination compensation payment amounting to ten, fifteen, or twenty days wages for each year of continuous service with the employer for a period of less than two years, less than five years, or more than five years respectively
- encashment of unused annual leave, including vacation leave, sick leave, and other types of leave depending on workplace policy and the agreement between the employer and employee.discretionary prorated annual bonuses
- gratuity payments
- retirement benefits if the employee has reached the specified age
- other forms of compensation included in the agreement between the employer and employee
If it is your first time leaving a job, you may be curious about the period in which you will receive your final pay after your resignation or termination. Well, according to the Employment (Termination and Lay-Off Benefits) Regulations 1980, employees should receive their termination compensation within seven days of their separation or termination from work.
Understanding Back Pay vs. Retroactive Pay
There can sometimes be confusion between back pay and retroactive pay. Hence, it is essential to know the difference between back pay and retroactive pay. Back pay represents the total amount of compensation the employer did not pay employees accurately for work performed up to a certain point in time. In other words, it represents the unpaid wages that the employee should have received for their work.
In contrast, retroactive pay is additional pay given to employees to make up for an underpayment or error in the past. It represents the difference between what the employee should have been paid and what they actually received for work performed during the pay period.
For example, if employees worked overtime but their employer denied overtime pay, the back pay would refer to unpaid overtime wages despite their completing overtime work. Retroactive pay, on the other hand, would be additional pay due to the employees because they received a lower amount than they should have for the overtime work they performed.
Reasons you may get back pay
Malaysian employees may be owed back pay, for the following reasons:
Wrongful termination
You may be owed back pay due to wrongful termination when you are unfairly fired without a valid reason. In such cases, the employer must prove they had a justifiable reason for firing you.
If the termination is found to be unjustified, remedies are provided by the Industrial Court. These remedies can include reinstatement, compensation in place of reinstatement, and back wages covering the period from the date of termination to the date of the award, not exceeding two years of your last drawn salary.
Payroll errors
Another reason you may be owed back pay is due to payroll errors. If you discover a payment discrepancy caused by some honest mistakes, you may also be eligible for back pay. For instance, if your employer mistakenly pays you the minimum wage instead of the higher wage specified in your contract, you could be entitled to receive the difference in pay as back pay.
Retroactive pay increases
You may also be owed back pay due to a retroactive pay increase. For example, if you receive a promotion to a managerial role with a pay raise, but your first paycheck reflects the same amount as your previous role. The difference between what you received and what you should have received for the new role constitutes back pay owed by the employer.
Calculating back pay
In case you get terminated 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 financial compensation, 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 gross monthly pay is RM 3,000 and the last time your employer paid you was November 1, 2023. If your last day of work was November 10, 2023, you have nine days of unpaid wages.
If you multiply RM 3,000 by 12, you get RM 36,000. This is your annual pay. Next, divide RM 36,000 by 260, and you get RM 138.46, 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 RM 138.46 by 9 (workdays), which gives you RM 1246.14.
Termination compensation
As mentioned earlier, termination compensation in Malaysia depends on your duration of service with your employer. For example, if you have worked continuously for your employer for four years, your compensation will typically be 15 days' wages for each year of service.
Using the daily rate of RM 138.46 mentioned earlier, let's illustrate this calculation. If we take RM 138.46 and multiply it by 15 (representing 15 days' wages for one year), then multiply the result by four (for four years of service), we find that the termination compensation you would receive amounts to RM8,307.60.
Leave conversions
Leave conversions involve converting unused leave days into cash. To calculate this, you will multiply your daily rate by the number of unused leave days that can be converted to cash.
For example, let's say you have five unused convertible leave days. Using the daily rate of RM 138.46 provided earlier, you would multiply RM 138.46 by 5. This calculation would result in RM 692.30, which represents the leave conversion amount that your employer owes you for the unused leave days.
Note that all the benefits mentioned here are not exhaustive and may not encompass all elements contributing to your back-pay calculation. Depending on the terms of your employment agreement, additional factors such as retirement benefits, gratuity payments, annual bonuses, and other monetary benefits may also add up.
Furthermore, your employer may apply deductions to your pay based on company policies and state laws. These deductions could include mandated government contributions, deductions for absences or tardiness, loan repayments, or other liabilities.
Examples of back pay
To give you a better idea of the different scenarios where you may be eligible for back pay in Malaysia, here are some more examples based on types of employment:
- Salaried employee: Your workplace owes you back pay if your employer terminates your employment. You may also be eligible for back pay if you get a promotion and the employer fails to pay the increased wages and give the benefits that come with it.
- Hourly wages: For hourly workers, you may be due back pay if you have worked outside work hours but did not receive overtime pay.
- 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 a payroll systems error on your employer's end.
- Bonuses: Back pay also covers unpaid bonus money. 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 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, termination compensation, leave conversions, and other monetary benefits specified in your employment contract.
Note that these calculations typically exclude usual monthly deductions like mandated government contributions, loan payments, or penalties for absences or tardiness. - How do I ask for back pay?
To request back pay, it is advisable to communicate with your workplace's human resources department upon your termination. Inquire about any specific instructions or clarifications regarding your back pay, and express your preferred mode of payment. Additionally, ensure that you complete any necessary clearance forms, as this facilitates the release of your back pay. - When can I get back pay paid?
Under the Employment (Termination and Lay-Off Benefits) Regulations 1980, former employees should receive their back pay no later than seven days after their termination from work. - Is back pay taxed?
Yes, taxes apply to your back pay under Section 13(1)(e) of the Income Tax Act 1967. Taxable items include termination compensation, monetary and non-monetary benefits, and contributions the employer made to an unapproved provident or pension fund. - Is there a process in resolving back-pay disputes?
If you think your employer owes you back pay, 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 Industrial Relations. - 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, time records, and any official documents relevant to your employment and company policy.
