Calculating Back Pay

Back pay for federal employees must be calculated in accordance with the requirements of the Back Pay Act. The author offers some details about how this process works.

Note: The following article has to do with conventional back pay situations, as opposed to the current shutdown.  It is not possible to know with certainty whether, or how, Congress will handle this, but in the author’s opinion, due to the intense, demanding nature of back pay arithmetic, they will avoid this treatment.

What is back pay?  For Federal employees, back pay is money due an employee resulting from  an error regarding his compensation.  It could be the result of placement in the wrong step of a pay grade, a mistake regarding a promotion, incorrect locality pay, etc.  Whatever the reason, back pay must be calculated in accordance with the requirements of the Back Pay Act: 5 U.S.C. 5596, as augmented by 5 CFR 550.805.

The first part of the calculation is relatively straightforward:  just add up, by pay period, how much money the employee lost due to the mistake.

For example, the employee’s pay for the last 9 pay periods of 2012 and the first 11 pay periods of 2013 was incorrect.  His correct pay for the first 17 of these pay periods was $183.76 more than he received; for the remaining three pay periods the difference, due to overtime, was $199.30.  Add (17 * 183.76)  to  (3 * 199.30), or (3123.92 + 597.90), yielding $3,721.82.  Simple.  Now for the hard part.

The difficulty with back pay is in the calculation of interest.  By law:

  • interest must be calculated from each payday for each individual pay period, over and over, for all the pay periods in question.
  • the interest rate used is reset every quarter, by the Treasury Department.
  • interest is compounded daily, in addition to the compounding of principal every pay period.

Without dedicated software, this calculation process is quite tedious and susceptible to error.

Dedicated software was offered by the Office of Personnel Management (OPM).

Unfortunately, despite the offer, the download from this site failed to include the software, although it did provide the back pay law and regulation, along with documentation concerning the automated tool. Still, the actual computer program (backpay.exe) was missing.

Upon being advised of this, OPM stated backpay.exe had a problem of some sort, and would be fixed.  Then they removed the download page completely, which precludes further complaints about the missing software.  Problem solved.

The USDA’s National Finance Center (NFC) runs payrolls for 140 Federal organizations from all three executive departments, with approximately 600,000 total employees.  Processing of back pay is included in NFC services.  However, automation for back pay interest is (apparently) non-existent.  Note page 53 of Chapter 11 of the NFC Payroll/Personnel Manual:

Title I, Chapter 11 Non-Automated Processing 

Interest on Back Pay 

The interest on backpay must be computed manually. The Agency must submit a request in SPPS Web after making a determination that interest is due. The SPPS Web request is only for payment of the interest due. A personnel action must be processed first to process backpay for 26 pay periods. NFC computes the backpay (including interest) based on the biweekly amounts and pay dates.

Does “computed manually” mean it was performed by a person, as opposed to software?

Above was published by NFC in July 2013.  At that time, no automated method was known to be available for correctly computing interest on back pay.

(Note: for the employee in above example, interest is $75.32, with a total debt on Sept 25, 2013 of $3,797.14.)

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.