What Is Retro Pay?
The definition of retro pay (short for retroactive pay) is compensation added to an employee’s paycheck to make up for a compensation shortfall in a previous pay period. This differs from back pay, which refers to compensation that makes up for a pay period where an employee received no compensation at all. Calculating retro pay and sending it out as quickly as possible is important to keep employees satisfied while keeping the company on the right side of labor laws.
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What Are Some Payroll Mistakes That Require Retro Pay?
Most of the time, compensation shortfalls happen when compensation changes aren’t reflected in the following payroll run. Here are a few examples:
- Overtime: forgetting to multiply overtime hours by 1.5
- Shift differentials: failing to pay an increased rate for hours worked outside an employee’s normally scheduled shift
- Commissions: with some accounting methods, a late-paying client may delay funds for paying out commissions
- Raises: failing to adjust an employee’s pay rate after giving a pay raise
Can Court Rulings Require Retro Pay?
There are situations where an employee can take their employer to court in pursuit of retro pay. These include the following:
- Discrimination: a group of employees receives preferential compensation treatment over another based on race, gender, age, or other protected status.
- Retaliation: an employer fires an employee because of whistleblowing or as the victim of harassment.
- Breach of contract: an employer fails to pay the employee or contractor the negotiated rate.
- Overtime violations: an employer fails to factor in overtime (a common violation).
- Minimum wage violations: an employer pays employees less than the minimum wage set out in the Fair Labor Standards Act (FLSA), whether on the books or under the table.
How Do I Calculate and Distribute Retro Pay?
When figuring out retro pay, consider the following:
- Compensation type: hourly or salaried?
- Overtime: is the employee exempt from overtime?
- Duration: how many pay periods are affected?
To get a gross figure for retro pay, calculate the difference between what the employee received and what the employee should have received, factoring in all overtime and pay differentials.
Most often, retro pay is calculated manually and added to the next pay period as miscellaneous income, rather than adding extra hours or making changes to the pay rate for a single paycheck. Employee withholding choices and employer payroll taxes also apply to retro pay, so employers need to ensure that these are reflected in payroll accounting.