As an employer, ensuring accurate and timely payment to your employees should be of utmost importance. It is not just a legal obligation but it can help build a stronger workplace. In this article, we will cover a crucial aspect of payroll management called retro pay. As you read through, you will gain insights into what retro pay is, how it functions, its’ distinction from back pay, and the timeframe for its’ distribution. This knowledge is vital in maintaining compliance and improving employee satisfaction.
At Paper Trails, we take every opportunity to educate business owners and HR professionals. This education could come in the form of a compliance topic that impacts small to medium sized businesses, or certain tips to improve business operations. Being able to answer the question, “what is retro pay?” is part of operating a successful business. So, let’s get started.
What is retro pay?
Retro pay is an essential concept in the world of payroll management. Simply, retro pay is the additional funds included in an employee’s wages to rectify a shortfall in payment from a prior pay period. It’s about ensuring that your employees are compensated fairly for their hard work.
In managing a growing business, things like salary increases or bonus adjustments can sometimes get delayed or overlooked. When you finally update the payroll, retro pay ensures that your employees don’t lose out financially because of these delays. This is crucial for maintaining morale, trust, and loyalty among your team.
Why would retro pay be owed?
Retro pay could be owed for a few reasons, including:
- Salary Increase Delays: If an employee is granted a raise or a salary increment that is effective from a specific date, but the new rate is not implemented in the payroll system immediately, retro pay compensates for the difference between the old and new salary from the effective date of the increase to when it was actually applied.
- Bonus or Incentive Adjustments: Sometimes, bonuses or incentive payments based on performance metrics are calculated and finalized after the period to which they apply. In such cases, retro pay is used to provide these earned bonuses or incentives retrospectively.
- Incorrect Pay Rate: If an employee is accidentally paid at a lower rate due to clerical errors or employee misclassification in the payroll system, retro pay is given to make up for the difference between the actual pay rate and the lower rate paid during the affected period.
- Overtime Pay Corrections: When overtime calculations are incorrect in the initial payout, perhaps due to misreporting or miscalculation of hours worked, retro pay is used to compensate for the additional overtime wages owed to the employee.
How does retro pay work in payroll?
Now, let’s break down how you actually calculate and distribute retro pay. The first step is identifying the pay period during which the employee was underpaid. Once you have the timeframe and the amount by which the employee was underpaid, it’s time to do some math. You’ll need to calculate the difference between what the employee was paid and what they should have been paid for that period. This could involve hourly rates, salary increments, or even (blended) overtime pay that wasn’t correctly accounted for. The difference is the amount of retro pay and generally would be paid to the employee on the next pay day.
Here’s a tip: Implement a payroll system, like isolved, that can keep detailed records of all salary changes. This way, if you need to calculate retro pay, you have all the information readily available. This not only simplifies the process but also helps in maintaining transparency and accuracy with your employees.
Example of retro pay:
Here is an example in real life: Your employee Joe, was due for a raise from $50,000 to $55,000 annually starting on July 1st. However, due to some oversight, his salary is updated only on September 1st. Now, Joe is owed the extra pay for July and August.
Here is how to make the calculation: Find the monthly difference ($5,000 per year/12 months = $416.67) and multiply it by two (for July and August). So, you owe Joe an additional $833.34 ($416.67 x 2). This would typically be paid to Joe at the next pay day.
Is this the same as back pay?
Retro pay and back pay are often used interchangeably, but they are distinct concepts in the payroll. Retro pay deals with paying employees the difference due to a rate change. On the other hand, back pay is about compensating for wages that were entirely missed or incorrectly calculated.
Think of back pay as the amount you owe an employee when you haven’t paid them at all for their work or if you’ve paid them less than the minimum wage. It’s often the result of clerical errors, misinterpretation of wage laws, or sometimes legal disputes. Understanding the difference between these two is crucial. While both ensure that employees are paid what they are owed, they stem from different payroll errors and have different implications for your business.
When to pay retro pay
Generally, the retro pay would be paid in the next pay cycle.
- Why It Matters: The general rule of thumb is to issue retro pay in the next payroll cycle following the resolution of the salary discrepancy. This prompt action helps maintain trust and morale among employees, showing that the company values fair and timely compensation.
However, it is not always required to be paid in the next cycle.
- State Differences: Different states might have specific laws governing the timing for retro pay. It’s crucial for businesses to be aware of these legal requirements to avoid penalties or legal complications.
Finally, there may be some special circumstances on a case by case basis.
- Contractual Obligations: In cases involving union contracts or specific employment agreements, the timing for retro pay might be dictated by the terms of these contracts.