What is Retro Pay?

The definition of retro pay (short for retroactive pay) is compensation added to an employee's pay to make up for the lack of compensation in a previous pay period. This is different from back pay, which refers to compensation that makes up for pay periods when an employee has not received any compensation. Calculating retro pay and sending it out as soon as possible is important for keeping employees satisfied as well as keeping the company on the right side of labor laws.

What are some payroll mistakes that require retro pay?

In most cases, compensation reduction occurs when changes made to compensation are not reflected in the next payroll run. Here are some examples:

• Overtime:  Forgetting to multiply overtime hours by 1.5
• Shift differential:  the non-payment of an increased rate for hours worked outside of an employee's normally scheduled shift
• Commissions:  With some accounting methods, a late-paying customer can delay funds to pay a commission
• Pay increases:  failing to adjust an employee's pay rate after granting a pay increase

Can a court decision require prepayment?

There are circumstances in which an employee can take his employer to court for retro pay. These include the following:

• Discrimination:  One group of employees receives preferential compensation compared to another group based on race, sex, age, or other protected status.
• Retaliation:  An employer fires an employee for being a whistleblower or for being a victim of harassment.
• Breach of contract:  An employer fails to pay an employee or contractor the agreed rate.
• Overtime violations:  Employer does not take into account overtime (this is a common violation).
•  Minimum wage violations: The employer pays  its employees  less than the minimum wage set forth in the Fair Labor Standards Act (FLSA) , whether by law or implicitly.

How do I calculate and distribute retro pay?

Consider the following when determining retropay:

• Type of compensation:  Hourly or salary?
• Overtime:  Is the employee exempt from overtime?
• Tenure:  How many payment periods will be affected?

To get the gross retropay figure, calculate the difference between what the employee received and what he or she should have received, taking into account overtime and salary differences.

Most often, retro pay is calculated manually and added as miscellaneous income to the next pay period, rather than adding additional hours or changing the pay rate for a single paycheck. Employee withholding options and employer payroll taxes also apply to retro pay, so employers need to make sure these are reflected in payroll accounting.