What Is Retro Pay?

Retro Pay, which is short for Retroactive Pay, refers to compensation added to an employee’s paycheck to make up for an underpayment in a previous pay period. It differs from back pay, which is compensation paid to an employee who did not receive any pay at all.

Common Payroll Mistakes That Require Retro Pay Compensation

Shortfalls usually occur when changes in staff compensation are not accounted for in the subsequent payroll run. These mistakes can include:

  • Incorrect hourly rate: If an employee’s hourly rate is incorrect in the payroll system, they may be paid less than what they are entitled to. In this case, the employer would need to make up the difference in retroactive pay.

  • Missed overtime: If an employee worked overtime but was not paid the correct overtime rate, the employer would need to provide retroactive pay for the additional amount owed.

  • Incorrect deductions: If an employee’s deductions, such as taxes or benefits, were calculated incorrectly, the employer would need to provide retroactive pay to make up for the difference.

  • Late payment: If an employee’s paycheck is delayed due to a payroll error, the employer may need to provide retroactive pay to make up for any financial hardship the employee experienced as a result.

  • Misclassified employees: If an employee is misclassified as exempt or non-exempt, they may not receive the correct pay for their overtime hours worked. The employer would need to provide retroactive pay to make up for any unpaid overtime.

Retro pay court rulings.

There are cases where an employer may be taken to court for Retro Pay compliance issues. These include the following:

  • Discrimination: The unfair treatment of employees based on their race, gender, age, or any other protected status, where a group of workers receives unfair compensation than others.
  • Retaliation: When an employer terminates an employee either for speaking out against illegal activities, known as whistleblowing or for being a victim of harassment.
  • Breach of contract: When an employer fails to fulfill their contractual obligation to pay an employee or contractor the agreed-upon compensation.
  • Overtime violations: When an employer does not factor in overtime hours worked by an employee, which is a common violation.
  • Minimum wage violations: When an employer pays their employees less than the minimum wage established by the Fair Labor Standards Act (FLSA), whether through official channels or under the table.

Calculating and Distributing Retro Pay

When determining retro pay, calculate the difference between what the employee received and what should have been received, including overtime and pay differentials, to get the gross value for retro pay. Retro Pay is commonly calculated manually and included in the miscellaneous income category in the next paycheck, instead of adjusting the pay rate or adding extra hours to resolve a single pay period issue. Employers should ensure that employee withholding preferences and applicable payroll taxes are taken into account when accounting for Retro Pay.