Retroactive pay refers to money added to an employee’s paycheck to correct a previous payroll error. If an employee is underpaid, whether due to miscalculated wages, missed raises, or delays in overtime payments, the difference between what was paid and what should have been paid must be reimbursed. This correction is known as retroactive pay.
It’s important to note that retro pay differs from back pay: back pay applies when an employee was not paid at all for time worked, while retro pay is used to fix incorrect payments.
When Does Retro Pay Apply?
Several situations may require retroactive pay, such as:
- A raise or bonus was approved but not reflected in the employee’s paycheck.
- Overtime was worked but not properly compensated.
- A shift differential (like night shift pay) was overlooked.
- Payroll processing errors caused delays or underpayments.
For example, if a raise is effective on January 1 but isn’t reflected in paychecks until February, the missing amount for January would be paid retroactively.
Retro Pay vs. Back Pay
Back Pay is compensation owed for entire missed pay periods, like in wrongful termination cases or unfulfilled hours.
Retro Pay, however, is used to adjust incorrect pay, say, for a forgotten bonus or an error in hourly rate.
Both can be issued as separate payments or added to a future paycheck.
Common Retro Pay Scenarios
- Unpaid Overtime: If overtime was worked but paid at the regular rate, the difference must be paid retroactively.
- Delayed Raises: When a salary increase is not reflected immediately in payroll.
- Commission Delays: If a client delays payment, resulting in a delay in commission payout.
- Missed Shift Premiums: Employees working premium shifts (like night shifts) must receive the appropriate rate. If omitted, retro pay is required.
Is Retroactive Pay Considered a Bonus?
No. Retro pay is not a bonus, it’s a correction. However, if an employee received a partial bonus, retro pay might be issued to make up the difference.
Example: If Kelly was promised a $5,000 bonus but only received $3,000 due to a processing error, she would be owed $2,000 in retro pay to correct the mistake.
How to Calculate Retro Pay
For Hourly Employees:
- Determine the correct hourly rate.
- Subtract the paid rate from the correct rate.
- Multiply the difference by the number of hours worked.
- The result is the amount of retro pay owed.
For Salaried Employees:
- Find the correct pay per period (based on the new salary).
- Subtract the previously paid amount per period.
- Multiply the difference by the number of affected pay periods.
- This gives the total retroactive pay.
Example:
Tom earns $80,000/year and receives a raise to $85,000/year. He is paid biweekly, so his old pay was $3,076.92 and new pay is $3,269.23.
If the raise is missed in the first cycle, he is owed $192.31 in retro pay.
When Is Retro Pay Required?
Under the Fair Labor Standards Act (FLSA), employers are required to pay retroactive wages within 12 days after the end of the relevant pay period. Beyond recommends ensuring any retroactive amounts are processed in a timely manner and reflected clearly on pay stubs.
Reporting and Communication
Employers should clearly communicate the reason for retro pay, the exact amount, and when the payment will be issued. Retro pay is typically delivered as a lump sum, either via direct deposit or check, and doesn’t have to coincide with the normal payday.
Retroactive compensation is not considered a fringe benefit and should be reported properly through payroll channels.