Payroll processing requires accuracy and timeliness each pay period. While payroll teams and employers can run payroll programs as best as they can, payroll mistakes can still happen from time to time. What can you do if you paid an employee less than what they were entitled to? Do not panic. The good thing is employers can remedy payroll mistakes by giving retro pay.
What is “retro pay”?
Retro pay is also called retroactive pay. It is a term that refers to the compensation that an employer adds to a paycheck to make up for what was supposed to be given in a previous pay period. To put it simpler, retro pay is the pay that an employer owes an employee for work performed in the past.
Employers need to give retro pay as soon as possible to prevent complaints, employee dissatisfaction, labor law infractions, and other consequences.
Generally, employers calculate retro pay manually to add to the next period. When computing retro pay, don’t forget to review an employee’s job classification. Is the employee hourly or salaried? Exempt or non-exempt? Also, how many pay periods need to be remedied? Additionally, payroll teams also need to account for payroll taxes.
What are some examples of payroll mistakes that require retro pay?
Mistakes in payroll that require retro often stem from failing to update any compensation changes in the current payroll system. For example:
Forgetting to input commissions or bonuses
Forgetting to input pay raises
Miscalculating overtime pay
Forgetting shift differentials
Is retro pay the same as back pay?
Back pay and retro pay both involve paying employees past wages. Because of this, many people conclude that these terms can be used interchangeably. Despite their similarities, retro pay and back pay are not the same. Let’s see how they are different.
When we talk about back pay, this is when an employer owes an employee wages that were not paid at all.
When we talk about retro pay, this is when an employee is paid less than what was supposed to be paid.
Let’s have an example.
Victoria works 40 hours a week as a receptionist. She was paid for the 40 hours that she worked. However, Victoria’s employer paid her the wrong rate per hour. Instead of being paid $15 per hour, her employer paid only $10 per hour. In this case, Victoria’s employer owes her retroactive pay.
On the other hand, let’s say Victoria’s employer announced that she will receive a bonus of $200 on the current pay period. But when Victoria received her paycheck, the bonus was not included. In this case, Victoria’s employer owes her back pay.
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