Retro pay, short for retroactive payment, is a type of compensation you pay employees for work they performed in a prior period. As an employer, you need to pay this amount when you pay an employee less than the amount they should get.
Retroactive pay differs from back pay, which is essentially the wages you owe an employee because you didn’t give it. You make retro adjustments when you miscalculate the employee’s compensation or forget to record the raise in their wages or salaries. Essentially, you’ll pay your employees amounts they previously earned, not ‘extra wages.’
When do You Need to Make Retroactive Adjustments?
There are a few instances when you’ll need to adjust your employees’ payrolls. The following sections include some of the scenarios where this pay is applicable.
1. Miscalculated Wages
Miscalculations are common when calculating wages for workers. This may happen due to the workers putting in incorrect working hours, recording the wrong pay rate, or just a simple error when running the payroll.
2. Miscalculating Overtime Payments
Sometimes, miscalculations can happen in overtime payments. Employees usually work forty hours per week. If they work more hours than that, they must get overtime pay. To calculate overtime payment, you need to multiply by a certain amount. Forgetting to use that amount can lead to incorrect or missed overtime payments.
3. Salary Raises
If you’ve awarded your employees a raise in their salary or wages, you may mistakenly run the old pay rate while running their payrolls. You’ll need retroactive pay to adjust the miscalculated amount on the current or a later payroll.
4. Bonus Calculations
Employees may earn bonuses for exemplary performances. As an employer, you may decide to pay them their bonuses at a later period.
5. Commissions Missed in Pay Stubs
If you have sales personnel, they can earn additional commissions in a pay period from customers. If they don’t find the commissions they’re entitled to on their payrolls, they’re entitled to retro adjustments, especially if you use a draw against the commission system.
6. Missed Shift Differential Payments
If you have shifts in your business, you may shift some of your employees to different shifts with higher pay rates. In such instances, it’s normal to forget to compensate them with the adjusted amount, needing a retro adjustment later.
7. Multiple Pay Rates
If you have an employee working in more than one position with different pay rates, you may end up running the wrong pay rate on their payroll. You must adjust the rate to pay for multiple responsibilities in such cases.
How Can You Calculate Retroactive Pay?
When calculating the retroactive payment for your employees, you must first determine whether they’re paid wages or salaries. Besides, check for their eligibility for overtime if they’ve reported working more than forty hours.
If they get wages, you should multiply the overtime rate by the total hours they worked in a week, including overtime. And if they get a fixed salary, you’ll need to compare the amount they should get with the amount they received.
You may also need to determine the pay periods with errors. This mostly happens when an employee gets a raise, but the payroll doesn’t have the updated information.
After determining all the factors that need adjustments retroactively, you need to calculate manually. Determine all the pay periods that need adjustments, and then calculate how much you need to compensate to make up for the pay rate or overtime payments.
How Can You Pay the Adjustments?
Before you make adjustments for the missed payments, ensure that you, as an employer, understand what the adjusted payments are for. Retroactive payments also influence income taxes and FICA taxes.
You can make these adjustments using two methods:
By adding retro payments to regular wages, and
By paying it as a standalone payment.
Do You Need Legal Proceedings for the Payments?
There are certain circumstances when an employee can take their employer to court for retroactive payments. Or even if that’s not their target, the employee can be compensated with retro adjustments. Following are the violations by the employer for which the employee will qualify to receive retro payments:
Violations of overtime: when the employer refuses to pay overtime to qualified employees.
Contract breach: when the employer doesn’t pay the minimum salary agreed upon in the employment contract.
Discrimination: when an employee receives less pay than others in the same position with the same level of expertise, they may be a victim of discrimination based on gender, race, religion, or something else. They can qualify for a retro payment if they apply for a court hearing.
Retaliation: when an employee gets fired because they were a victim of harassment, they can file for court proceedings.