Retroactive pay definition and meaning
Retroactive wages are added to an employee’s paycheck to make up for a payment shortfall. In the event that payments are calculated incorrectly, or are not paid on time, retroactive pay is owed to cover the difference between what was paid and what should have been paid. This is different then back pay, which is pay to make up for periods when the employee did not receive any compensation for work.
More about retroactive pay
There are other situations where workers could be entitled to retroactive pay. For instance, an employee might receive it if a raise or bonus is not applied in a timely manner. In addition, workers may also be owed pay if there is a delay in the payroll process or if an employee works overtime but isn’t paid the proper amount due for their extra hours.
In the event that overtime hours are calculated in the wrong workday, or that the workday itself is not defined in accordance with applicable labor laws – like weighted overtime, overtime pay based on the 8/80 rule for hospitals and nursing homes, or because of a change to the workweek schedule – additional overtime pay may also be owed as retroactive pay.
What is the difference between back pay and retro pay?
Back pay refers to compensation you owe an employee for work they’ve completed in the past. You might pay an employee back pay for a missed bonus, commissions, missed overtime pay, wrongful termination, or missed hours.
Retro pay, on the other hand, accounts for the difference between the wages an employee should have received and the wages they were actually paid. It’s intended to correct a previous payment shortfall. Retro pay can resolve payroll errors, forgotten raises, and overtime miscalculations.
Put simply, back pay is for situations in which the employee didn’t receive payment at all whereas retro pay addresses payment errors. To process back pay or retro pay for an employee, you have two options: run a separate paycheck or add the owed wages to their next regular paycheck.
Is retroactive pay considered a bonus?
No, retroactive pay is not a bonus. However, if you paid an employee a bonus but they didn’t receive the correct amount, retro pay might apply. You may pay them the shortfall in a standalone paycheck or include it in their regular paycheck.
Let’s say Kelly earned a $5,000 bonus at the end of the quarter for going above and beyond for your company. She actually received $3,000 instead of the $5,000 she was owed. Once you’re aware of this miscalculation, you’ll retroactively pay Kelly the $2,000 she is entitled to.
What is a retroactive pay example?
Tom, an employee at your company, earns an annual salary of $80,000 and is paid biweekly or 26 times a year. His gross pay for each pay period is $3,076 ($80,000/26). During his review, you reward him with a $5,000 raise for excellent performance over the past year. Therefore, his gross pay for each period will increase to $3,369 ($85,000/26).
During the initial pay period after Tom earned his raise, the accounting department forgot to include the raise. As a result, his gross pay was still $3,076 instead of the $3,369 he should have received. At the end of the next pay period, Tom received his typical gross pay of $3,369 plus $293 in retro pay ($3,369-$3,076). The total on that paycheck was $3,662 ($293+$3,369).
Does retro pay include overtime?
Retro pay is intended to correct a variety of payroll mistakes, including missed overtime.For example, let’s say Heather, one of your employees is eligible for overtime and worked more than 40 hours one week. You accidentally paid her at her regular rate rather than her overtime rate. In this case, retro pay will apply. You’ll need to retroactively pay her the miscalculation to ensure she receives the overtime payment she earned.
How do employees get paid retroactive pay by employers?
Employees are entitled to retroactive pay when they didn’t receive the correct compensation for their work at the time it was due. Here are several common scenarios that may lead to retro pay:
- Ken worked overtime but you paid him at his regular rate rather than his overtime rate.
- Susan received a raise but the additional wages were not reflected in her pay.
- Michael was supposed to get paid at a higher rate because he worked the night shift but his paycheck did not include it.
- Valerie earned a commission but a late payment by a customer led to delays so she is eligible for retro pay.
How do employers account for retroactive pay?
According to the Fair Labor Standards Act (FLSA), employers are required to make retroactive payments no later than 12 days after a pay period expires. To calculate retro pay for an hourly employee, follow these steps:
- Figure out the correct hourly rate.
- Deduct the incorrect hourly rate from the correct hourly rate.
- Determine the number of hours worked at the incorrect rate.
- Multiply the difference in hourly rates by the number of hours worked at the incorrect rate to find the total amount of retro pay you owe.
To calculate retro pay for a salaried employee, follow these steps:
- Figure out the new pay per paycheck.
- Calculate the old pay per paycheck.
- Deduct the old pay per paycheck from new pay per paycheck.
- Multiply the difference in pay per paycheck by the number of paychecks the employee received at the old pay since the increase took effect to come to the total amount of retro pay you owe.
Some additional examples of when retro pay may apply include:
- Commissions: If earning commission is part of your compensation package, in some cases the client from which the commission is generated may be late in paying. This in turn, may cause your compensation to be delayed during a particular pay period. As a result, the commission may be paid retroactively during a subsequent pay period.
- Shift differentials: Some workplaces pay different wages depending on the shift the employee works. For instance, a graveyard (overnight) shift may pay more than a standard daytime shift. If you forget to record working a different type of shift than you normally do on your timecard, the pay differential may not be calculated. In such cases, you would have to be paid the differential retroactively.
As a best practice, employers should provide the employee with an explanation of why they are receiving retroactive pay, as well as the amount they’ll receive, and when to expect this pay. Employees will usually receive retroactive pay as a single payment, or lump sum. This payment may be remitted as a check or by direct deposit, and does not need to align with a typical payday. This payment can not be converted to a fringe benefit, or any other such compensation.
Using retroactive pay in a sentence
“I worked the late shift last week, which pays an extra $15 per hour. But because I forgot to record it on my timecard properly, I am being paid the extra hourly income as retroactive pay and will receive it during the next pay period, not during this current pay period.”
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