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Retro Pay

What is Retro Pay?

The term Retro Pay, or retrospective pay or retroactive payment, refers to payment added to an employee's salary to make up for a compensation deficit in a previous pay period. That payroll overlooks may be commissioned, over-time as 1.5 times the salary per hour, raise of salary and shifts-allowances or technical allowances; etc.

It differs from case to case, though inadvertent, mistakes do happen sometimes due to human error, and the rest because of anything. Removing a wrong done on part of the process or operational error, retro pay is indeed a review or reconsideration of an employee’s financials paid inaccurately. Retro Pay is the pay difference a company owes an employee to pay.

Does Retro Pay create a shortfall in your financial statement?

The answer to this question is “Yes” and “No” both, as per the scenario. “Yes” in case of when Retro pay is not identified and hence could not be rectified; and “No” in the case when the payroll is rectified through Retro Pay adjustments as per the employees’ compensation should have been paid as per what employee earns actually.

What are the common reasons for which the business has to make or adjust the retro pay?

Following may be the reasons for which the businesses have to make or adjust retro pay:

What is the difference between calculating retro pay of hourly rate employees and salaried employees?

The difference between the calculations of the retro pay of an hourly or salaried employee can be understood with the following two examples:

Example 1: Calculate Retroactive Pay of an Hourly paid Employee

Amelia works 40 hours a week (5 days a week making 8 hours a day and 2 days as her off days). Her hourly wage rate is $ 10 per hour and her revised incremental wage rate is $ 12 per hour with effect from 1st March. She is paid weekly wages based on the number of hours worked.

The payroll mistakenly, paid her the first week of March’s wage on the old rate. Now she is to be paid her difference amount retro pay in the following week’s paycheck or a separate paycheck, but within the next 12 days as per FLSA regulations in the United States.

Hence, you need four figures to know for calculate Amelia’s retro pay being an hourly wage employee:

  1. Old per hour wage rate which is $ 10
  2. Per hour wage rate revised which is $ 12
  3. Revision date that is 1st March
  4. Working hours in total missed or miscalculated to pay her back her retro pay

First, you need to calculate the difference of pay to be paid to Amelia with the subtraction of the old wage rate from the revised wage rate to take the difference out:

Difference of pay rate = revised wage rate – old wage rate

Difference of pay rate = $12 - $10

Difference of pay rate = $2

For calculating retro pay you need to multiply the difference in pay rate with the number of hours missed or miscalculated

Retro Pay = Difference of pay rate multiplied by the number of hours missed or miscalculated     

Retro Pay =  $2   X   40 hours                                                 

Amelia’s Retro Pay = $80

Example 2: Calculate Retro Pay of a Salaried Employee

Laura is a salaried employee with XYZ & Co. The employee receives $12,000 per annum. She is given a 20% annual salary raise making her revised annual salary equal to $ 14,400 with effect from 1st January. Though inappropriately, she is paid on January 31 the salary on the same old rate by the payroll division of XYZ & Co.

Calculate her Retro Pay: (Keeping in mind to pay her a separate check of Retro Pay within 12 days of the mistaken payment that is on or before 12th February, the following month, as per US FLSA law).

For calculating Laura’s retro Pay you need to know the following:

  1. Old annual salary
  2. Revised Annual pay raise
  3. Difference between the old and the new salary rate
  4. Date of effect of pay raise

For calculation of the difference between the old and the new salary rates you need to subtract the old rate from the revised rate, hence:

The difference between the old and the new salary rate = Revised Salary Rate - Old Salary Rate

The difference between the old and the new salary rate = is $14,400 - $12,000

The difference between the old and the new salary rate = is $ 2,400

As annual salary has 12 pay periods of monthly payments, therefore, divide the difference by the number of periods, the outcome would be Laura’s monthly pay raise and the same would be her Retro Pay which was missed is to be paid:

Monthly Pay Raise = $2,400 divided by 12

Laura’s Monthly Pay Raise = $200

As Laura had given January salary on the old rate, hence XYZ & Co. owes to pay Laura an extra $ 200 check as her calculated Retro Pay. Importantly note that the Retro Pay has to be paid on or before the 12th day of February as the following month, as per the United States FLSA rules.

What is the difference between retro pay and back pay?

 The main difference between the retro pay and the back pay is the former is a missed or miscalculated amount an employer needs to compensate its employee and the latter is the compensation yet to be paid to the employee by the employer.

What is Law concerning how Retro Pay can be paid?

Retro pay can be either paid with the normal wages of the next week’s salary payment or a separate paycheck can be provided to an employee but US FLSA (United States Fair Labor Standards Act) rule on it is clear that the retro pay is compensated within 12 days of the pay period on which it should have been paid and is missed.

The employers must bear in mind that the below-mentioned domain of payroll is taken care of in terms of paying an employee Retro Pay and within the stipulated time frame:

Can the Employers be called upon by the Honorable Courts of Law on Retro Pay issues?

Yes, the honorable Courts of Law may call any employer upon retro pay issues if raised by an employee in the form of as mentioned here:

Retro pay and Tax withholding

Tax withholdings of payroll taxes on retro pay are the responsibility of the employer. The taxes to be withheld are as mentioned below: 

Employers need to understand as well as implement the rules, regulations, and policies upon Retro Pay and Payroll Taxes of Federal, State, and Local levels, failing which the organizations may face litigation issues about human rights violations inviting penalties and reputation challenges.

Related: Compensation