What Is Retro Pay?
Retro pay is compensation that is added to an employee’s pay to make up for a reduction in compensation in a previous pay period. This is different from back pay, which is a form of the amount of compensation to make up for the period in which the employee did not receive any compensation in any way. Making retro-pay calculations and making it available as fast as you can is essential to ensure that employees are satisfied and making sure that the business complies with employment laws.
What Are Some Payroll Mistakes That Require Retro Pay?
Most of the time, the reason for compensation shortages is that changes don’t reflect in the next pay period. Here are a few instances:
- Time: Missing the 1.5x pay rate when calculating overtime hours.
- Shift differentials: Not paying an increase for hours that are not part of an employee’s normal scheduled shift
- Commissions: In some accounting methods, a client who has not paid on time could delay the payment of commissions
- Pay raises: Failure to adjust the rate of pay after an employee has been given a pay increase.
Can Court Rulings Require Retro Pay?
There are instances where employees can sue their employer in court to obtain retro pay. This includes:
- Discrimination: An employee group is treated with preferential compensation over others because of race or gender, age, or any other protected status.
- Retaliation: Employers fire employees due to whistleblowing, or because they are the victim of harassing behavior.
- Breach of contract: The employer does not pay its contractor or employee at the agreed rate.
- Overtime violation: An employer fails to account for overtime (a typical violation).
- Minimum wage violations: Employers pay their workers less than the minimum wage, which is established through the Fair Labor Standards Act (FLSA), regardless of whether it is in the books or under the table.
Also read: What Is an Annual Incentive Plan? A Complete Guide for Employers
How Do I Calculate and Distribute Retro Pay?
In determining retro pay, take into consideration the following:
- Type of compensation: Hourly or salaried?
- Overtime: Is the employee exempt from overtime?
- Duration: What number of pay periods are affected?
To calculate a figure for retro pay, calculate the difference in what an employee was paid and what they would have earned, weighing the overtime pay and variations.
Most of the time, retro pay is calculated manually and then added to the following pay period as miscellaneous income instead of adding additional hours or changing the pay rate of only one pay period. Employer withholding options and employee payroll taxes are also applicable to retro pay, and employers should ensure they are included in the payroll accounting.
Differences between retro pay vs back pay
Back pay and retroactive pay are two distinct terms. Retroactive pay is a form of payment that occurs if an employee was paid at a lower rate than what they would have received, usually because of payroll delays or mistakes that arise from minor errors, like out-of-sync systems.
To remedy this, businesses could include the retroactive payment due in the next paycheck or make an exclusive one-time payment.
In contrast, back pay is due to more serious issues, such as overtime not being paid and minimum wage violations, or disagreements between employees and the employer. These types of situations typically arise from more severe situations, like legal disputes. Back pay is usually resolved following a legal decision or a dispute resolution, indicating an important distinction in the motives for these two types of compensation
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