Retro pay, short for retroactive pay, refers to a monetary compensation given to make up for a shortfall in a previous pay period.
When Is Retro Pay Required?
Retro pay is required whenever the salary of an employee has not been paid out in full for any unwarranted reason.
Retro pay is often the result of payroll-related mistakes such as:
- Forgetting to multiply wages by 1.5 for overtime work;
- Failing to pay an increased wage for specific hours (e.g., night shift bonus);
- Delaying the payment of commissions due to late customer payment;
- Forgetting to adjust the salary of an employee after a raise or a bonus.
Retro pay can also be necessary as a result of a legal proceeding.
How to Calculate Retro Pay?
To calculate retro pay, the following aspects must be taken into consideration:
- The type of compensation;
- The amount of overtime;
- The duration of the payroll period.
What Are Examples of Payroll Mistakes That Require Retro Pay?
Common payroll mistakes that require retro pay include:
- Overtime: failing to apply the appropriate overtime rate;
- Shift differentials: failing to account for extra hours of work outside the normal schedule;
- Raises: failing to adjust pay rate following a raise.