To create a back pay for an employee, you will need to
- Create a pay code for the back pay, then
- Create a pay for the employee and add the new backpay pay code to the pay
The most common type of back pay is for a post-dated increase in an employee pay rate. The other type of back-pay is where the employee is receiving payment for hours they previously worked but that were missed out of an earlier pay.
Create the Pay Code
Before adding back pay to an employee's pay you will first need to add a pay code for the back pay (Setup > Pay Codes).
The Tax Type should be a Taxable Allowance, which means that when you add back pay to a pay it can be set to be an extra pay, as directed by the IRD:
Lump sum payments include annual or special bonuses, cashed-in annual leave, retiring or redundancy payments, payments for accepting restrictive covenants, exit inducement payments, gratuities, or back pay. These are also called "extra pays".
Other settings on the pay code will depend on the type of back pay.
If the back pay is for a post-dated increase in an employee pay rate you should ensure the Units is set to Other, not Hours. This is to ensure the ordinary and average rate calculations are not skewed by hours paid at an abnormally low rate. The Pay Code Rate should be based on None. The other default pay code settings should be correct.
If the back pay is to pay the employee for hours that they previously worked but were missed out of an earlier pay, you should set the Units to Hours and the Pay Code Rate can be based on the Normal rate.
Add the Pay Code to the employee's pay
The new pay code can then be added to a pay, either as part of the regular pay cycle or a special pay. If doing a special pay we recommend setting the start and end dates to a past period, perhaps the period over which the back pay covers, or the same start and end dates as the last regular pay processed.
It is important to select Extra Pay when adding the pay line to ensure that the tax is calculated correctly. Please see the end of this article for more information on how tax is calculated on extra pays.