What is Retroactive Pay?

The meaning of retro pay or retroactive pay is compensation added to an employee’s paycheck to make up for work performed that wasn’t paid in a previous pay period. Retro pay is unpaid wages an employer owes an employee from a previous pay period.

Retroactive pay is when a business issues its employee(s) money to correct underpayment during a given pay period. Many confuse retro pay with back pay, but the two concepts differ. Back pay occurs when employers pay workers extra to make up for a month or period when workers did not receive any pay.

Retro Pay, on the other hand, occurs when companies realize that there was a problem or miscalculation during a pay period and did not pay their employees sufficiently.

Specifically, the role of retroactive pay is to make up the difference between the amount a worker was paid and the amount the employer owes them. Typical events that cause employers to include retro pay in workers’ paychecks include changes in workers’ salaries or pay rate changes that begin halfway through pay periods.

In this article, we will further outline the uses of retro pay. We will also go over the many applications of retro pay and the best way to calculate it.

Why Do Workers Get Retro Pay?

Retro Pay refers to wages employers owe their workers and have not yet paid. For example, suppose an employer awards an employee a bonus but has already received their monthly paycheck. In that case, the bonus will become retro pay, and the employer will include it in the next paycheck. Where a retroactive pay increase is awarded to employees as a result of collective bargaining or otherwise, it operates to increase the regular rate of pay of the employees for the period of its retroactivity.

When an employer realizes that they owe wages to a worker or several workers, they owe them retro pay. While the reasons for retro pay are numerous, the fact of the matter is that legally, employers must pay owed wages to employers.

For example, let’s say a worker logs ten overtime hours at the end of the pay period. If the overtime is too late to be counted in the current period, the employer should pay the overtime hours as retro pay and add the payment to the next paycheck.

Typically, employees have two years to recover their retro pay. However, if the court finds that the company purposefully attempted to avoid paying the employee, the worker may have three years to get their wages back.

How Does One Calculate Retro Pay?

Calculating retro pay can be challenging, and the calculations depend on the type of worker. Let’s look at calculating retro pay for hourly workers and compare it to calculating retro pay for salaried employees.

How Does One Calculate Retroactive Pay for Workers Paid by the Hour?

We need some specific information to compute the retroactive pay rate for hourly employees. First, employees must know their old pay rate per hour, their new pay rate per hour, and the date when the pay rate changed. They also must know the number of hours their employer paid them at the old pay rate.

To calculate gross wages for retro pay, the worker must multiply the hours the employer compensated them at the old rate times the difference between the new and old rates.

For example, Toby’s employer increased his pay rate from $11 to $12 per hour. The new pay rate began at the start of the previous pay period. He worked 70 hours during the previous biweekly period.

We calculate $12 minus $11 and get a $1 difference in pay rate.

We multiply 70 hours times $1 per hour and get $70.

The employer owes John $70.

How Does One Figure Out Retroactive Payment Amounts for Employees on Salary?

To figure out the rate of retroactive pay for employees on salary, workers must know the difference between the new and old salaries and the date that the employer changed the salary rate.

For example, let’s say that Molly’s employer pays her on a semi-monthly schedule, and her salary increases by 4%, going from $60,000 to $62,400.

The increase began on February 1st, and the company will pay it on March 15th.

Molly’s retro pay should cover two pay periods, and her paycheck on March 15th will include her new pay rate. Therefore, no retro pay is due to Molly for that period. However, if the timing differed, the employer may owe her retro pay.

What Are Some Employer Mistakes That Require Retro Pay?

Our California employment attorneys for companies often, compensation issues stem from problems with payroll. For example, if an employer gives a worker a raise, but the raise does not show up in the next payroll.

Here are a few common problems that cause employers to issue retro payments:

Shift Changes: Employers fail to pay the increased rate to employees who work outside or in addition to their normal work shifts.

Overtime Payments: Companies forget to include proper overtime pay (usually the pay rate times 1.5, unless it is double-time)

Pay increases: Businesses forget to change workers’ pay rates after formally issuing raises.

Bonuses: Employers fail to include bonuses in paychecks.

Can Court Rulings Enforce Retroactive Pay?

Some court decisions require employers to pay retro wages, and situations exist where workers can bring their employers to court. These situations include:

Minimum Wage Breaches: When an employer pays employees less than the minimum wage established by the Fair Labor Standards Act, they violate minimum wage laws in the state and federally.
Contract Violations: When an employer does not pay their employees or independent contractors the pay rate the parties agreed upon, the employer violates the contract.

Discrimination: Discriminatory behavior occurs when an employer favors one group of workers over another based on protected qualities, for example, race or gender.

Overtime Violations: If an employer fails to factor in overtime to a paycheck, they can be brought to court. However, this violation is fairly common since overtime is easy to overlook.

Retaliation: Retaliation occurs when an employer fires an employee who is a harassment victim or a whistleblower.

How Can Employers Calculate and Distribute Retroactive Payments?

All employers must know how to account for mistakes and payroll and compensation changes. Therefore, companies must understand how to calculate retro pay and include it in their employee’s paychecks.

When figuring out retro pay, companies must consider the following questions:

What is the payment type? Is the worker hourly or salaried?

Should extra hours be considered, or is the worker exempt from overtime?

How many pay periods must the employer consider and factor into the equation?

To come up with a gross retroactive number, employers can determine the difference between what the worker received for payment and what their employers should have paid them. Be sure to include all pay differentials and overtime hours and rates.

Most businesses calculate retroactive payments manually and add them to the subsequent pay period. They mark it as “miscellaneous income” instead of changing a worker’s pay rate for a very short time.

Workers’ withholding choices and company payroll taxes apply to retro pay, so all businesses must be aware of these possible additions.

Contact Nakase Wade

Many businesses do not fully understand how retro Pay works or why it is important. Understanding how to calculate retro pay can help business owners avoid employee disputes and possible court and legal fees.

If you are an employee whose employer owes you retro pay, or you are an employer who has questions about the retroactive pay you may or may not owe, contact Nakase Wade today. Our California business lawyers and corporate attorneys can help, and we offer free consultations. Contact our skilled, experienced legal team today.

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