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Retro Pay

What is Retro Pay?

Short for retroactive pay, retro pay refers to the compensation added to an employee’s pay check to counteract an error in payment from the previous compensation cycle. The situations that might create a need for retroactive parent include:

  • Raises: The employer gave a raise but didn’t immediately implement the rate change in the company’s payroll system.
  • Payroll errors: The employer paid for the wrong amount of time or experienced some other unexpected glitches. 
  • Overtime miscalculations: The employer incorrectly calculated overtime payment.
  • Multiple pay rates for different positions: If an employee earns two different pay rates, the employer may have used the wrong rate while calculating their earnings for a given period. 

The situations where retroactive pay is deemed necessary are usually handles by HR specialists or accounting professionals. HR specialists communicate with the employees and help them manage their concerns, while accounting professionals calculate the amount of retroactive pay that the team member should receive. 

How is Retro Pay calculated?

There are three elements the employer needs to comprehend while figuring out retro pay:

1. Compensation type: Is the concerned employee in an hourly pay contract or a salaried individual?

2. Overtime: Is the employee exempt from overtime?

3. Duration: The number of compensation periods in which the employee was mispaid. 

To obtain the gross amount for retro pay, calculate the difference between the pay received and the actual amount that the employee should have received, while also factoring in all overtime and pay differentials. Most often, retro pay is calculated manually and added to the next pay period as miscellaneous income, rather than adding extra hours or making changes to the pay rate for a single pay check. 

What’s the difference between Retro Pay and Back Wages?

Back wages may sound like another way to say retro pay, but they are different in definition. Back wages make up the difference between what an employee was paid and what they should have been paid. 

Examples of situations where an employee might owe back wages include unpaid bonuses, missed overtime pay, commissions, or failing to pay an employee entirely for the time they worked. 

The main difference between the two is that back wages are compensation that the employer hasn’t paid the employee yet. Whereas retro pay is the compensation that the employee owes an employee because they were underpaid in a previous pay period.