“Retro Pay”

What Is Retro Pay?

Retro pay, also known as retroactive pay, refers to the payment made to an employee in exchange for work completed during a previous pay period that was not remunerated in the current time. It usually occurs when there are changes to the compensation of an employee like an increase, bonus, or a correction to an underpayment. Retro pay is a way to ensure that employees are paid accurately for their work, which includes any adjustments that are made after the pay period has finished.

Exactly how does Retro Pay work?

• Compensation Type: Determine if the employee is on an hourly or salaried pay structure.
• Overtime Status: Assess if the employee is exempt from overtime or eligible for overtime pay.
• Duration of Underpayment: Identify the number of pay periods during which the employee was underpaid.
• To calculate retro pay, compute the disparity between the actual amount received by the employee and the amount they should have received. Consider overtime hours and pay differentials in the calculation. Retro pay is typically calculated manually and added to the subsequent pay period as supplementary income rather than altering the pay rate or hours for a single paycheck.

How Do Payroll Mistakes Require Retroactive Pay?

• Incorrect Hourly Rates: If an employee’s hourly rate is incorrectly entered or updated, resulting in underpayment for hours worked.
• Missed Overtime: Failure to accurately calculate and compensate for overtime hours, especially for non-exempt employees, may lead to retro pay adjustments.
• Salary Changes: Any adjustments to salary rates, whether due to promotions, raises, or changes in employment status, require careful updating to prevent underpayment.
• Missed Bonuses or Commissions: If bonuses, commissions, or other variable compensation components are not accounted for or miscalculated, retro pay may be necessary to rectify the error.
• Payroll Processing Errors: Mistakes during payroll processing, such as data entry errors or system glitches, can result in underpayment and necessitate retroactive adjustments.
• Incorrect Deductions: Incorrectly applied deductions, such as taxes, benefits, or wage garnishments, may lead to underpayment and require retroactive corrections.
• Miscalculated Benefits: Errors in calculating benefits, such as vacation accruals or sick leave, can result in underpaid wages that need to be adjusted retroactively.
• Shift Differentials: Failure to accurately apply shift differentials or premiums for certain shifts or work conditions can result in underpayment and require retroactive adjustments.

How are Retro Pay and Back Wages different?

• Retro Pay: Refers to compensation owed to employees for work performed in prior pay periods but not adequately compensated. It corrects underpayment based on changes in compensation rates or other factors.
• Back Wages: Denotes compensation owed by an employer to an employee for previously unpaid wages or benefits, such as missed bonuses, commissions, or overtime pay. Back wages address instances where the employer failed to pay the employee appropriately for work performed.

While retro pay addresses underpayment within the same employment period, back wages pertain to unpaid compensation from previous periods. Understanding and implementing both concepts ensure fair and accurate compensation for employees.

FAQs

What causes the need for retro pay?

Retro pay may be necessary due to payroll errors, such as underpayments, incorrect calculations, missed bonuses, or adjustments to wages.

How can employers prevent the need for retro pay?

Employers can prevent the need for retro pay by implementing robust payroll processes, conducting regular audits, and ensuring accurate record-keeping to minimise errors in wage calculations.

Can retro pay be negotiated with employees?

In some cases, retro pay amounts may be subject to negotiation with employees, especially if discrepancies in wages are significant or if collective bargaining agreements apply.

Is retro pay subject to taxes?

Yes, retro pay is generally subject to the same tax withholding requirements as regular wages, including federal income tax, state income tax, and FICA taxes.

When is retro pay typically issued?

Retro pay is usually issued in the subsequent pay period after the error or adjustment is identified and corrected.

Also See – Overtime Calculations | Superworks glossary | variable component in salary