What is retro pay?

Retroactive pay is a common practice that occurs in every company. It is referred to as retroactive pay or extra compensation for the prior period. It may happen because of miscalculations, salary raises, or overworked time that has not been taken into account. Retroactive pay is still a part of payroll, so it is subject to tax withholding. As a rule, there is no additional paycheck required to perform retro pay, but simply an extra payment is added to the next employee’s paycheck. An accountant, in this case, adds a new line in a pay stub for the next month.

What is the difference between retro pay and back pay?

Both concepts are about missing payments that had not been received by an employee. But, retro pay and back pay varies. Retro pay is about forgetting to add an extra sum of money to the employee’s bank account, which is usually unintentional. However, back pay occurs due to the skipped payment. An employer in this situation is aware of the missed remuneration. Back pay is caused by financial troubles in the company, discrimination, or court order. 

Common reasons leading to retro pay:

• Hourly rate increase. If, for example, an employee got a promotion and a wage increase, but the correction of the hourly rate was not taken into account at all or accounted for inaccurately. 
• Supplemental income discrepancy. Commissions from sales, extra bonuses, and other financial incentives may be not recorded in calculations. For instance, real estate managers often have different percentages received from selling property even if they work in one company. Hence, the commission from transactions varies and a new accountant may not be aware of these intricacies yet. 
• Shift differential. Late shifts, overworking, and working during public holidays are the reasons for obtaining higher wage rates in some countries. For example, most countries require employers to have double pay for working during public holidays. 
• Technical errors. Wrong equations used in spreadsheets during salary calculation, software glitches, or loss of data may also cause retro pay. 
• State requirements about the minimum wage increase. A mandatory raise can also influence the amount of money an employer owes to their staff. For instance, 
• Hiring international employees. Working with international talents means that the labor law of their country must be applied. For example, hiring a person from Spain implies two extra installments per year in July and December. In contrast to others, in Spain, an employer must pay “Paga Extra Verano” or Summer Bonus and Christmas Salary. Ignorance of this legislation may lead to an appeal to the court. Other typical mistakes when working with an international workforce are the differences in exchange rates and miscalculations in tax withholding that also differ from county to county.

How to proceed with retro pay?

1. Study the inquiry for retro pay. Some requests go straight to the HR department or payroll specialist, but some employees may address their issues to the business owners and the heads of departments. 
2. Review the request. 
3. Analyze the previous payments, find the mismatches in what is paid and what should have been paid, determine the discrepancies over time, and define the miscalculated pay period.
4. Figure out the compensation to be paid. It is better to do calculations manually since thorough research helps find imperfections in the payroll process. An optimized automated payroll system is usually error-free, but people who use it can make mistakes. 
5. Find the mistake that led to postponed pay and try to avoid it next time. Resolve the financial dispute with the employee and do retroactive pay.

How to calculate retro pay?

Case #1. Salaried employee

For example, an assistant working for you got a raise of 10% from the 1st of March. She has a semi-monthly payroll, but due to a mistake in the payslip, she is underpaid for now for two months. To determine the retro pay, you have to do the following:

• Check the annual salary that was set before the raise. In this case, it was 46,000$.
• Settle the updated annual salary according to the raise. For the assistance, it would be 50,400$.
• Find out the number of annual installments and the underpaid period. Because the assistant was paid twice a month, there were 24 payments in total. She has not been paid 4 times. 
• Determine the difference in payments. 

46,000/26*4=7,076$ is the amount of money according to her previous salary rate

50,400/26*4=7,753$ is the amount of money according to her new salary rate 

7,753$-7,076$=677$ is the retro pay over the period given.

• Pay the difference to the employee. The insufficient amount can be added to the next payroll. 

Case #2. Hourly paid employee

For example, a bartender worked overtime during a week because of the influx of customers who were attending a big sports event in the bar. The standard rate of a bartender is 15$, but working overtime is paid 5$ more than the wage. To puzzle out the retro pay, the next steps should be done:

• Determine the overworked hours. For the bartender, for example, he worked 3 more hours daily during a week. That means that there are 7*3=21 hours of overtime.
• Calculate the extra payment. 21 hours multiplied by 15$+5$ equals 420$ of extra pay.
• Carry out the retro pay.

Keep in mind that there are different types of staff members, namely exempt and non-exempt employees. The first group of people does not get paid for working overtime since the result of their work is not defined by the hours spent in a working place. This is true for people engaged in administrative and executive roles. Non-exempt employees, on the contrary, are those who usually work physically and whose presence in the workplace is essential for performing the work. In other words, customer service representatives, restaurant staff, or call center agents are examples of non-exempt employees.

Retro pay in terms of the  consequences

1. Legal outcomes. According to labor law, retro pay itself is not a subject of illegal actions. If an organization fails to pay an employee after the request for retroactive pay, then, the employee may go to court to appeal. In this scenario, the authorities may oblige the company to pay an additional penalty. 
2. Misqualification of employees as exempt or not or repetitive court appeals may encourage the authorities to start an investigation. But if it is proven that the mistake was not deliberate, it is not a big concern.
3. Increased contributions for pension, taxes, and social security. Logically, the rise of the payroll results in adjustments for paying other contributions from the salary. Thus, before handing over a new payroll to the employee, an in-house accountant or a payroll provider has to recount the deductions and withholdings.
4. Having retro pay done creates a positive working environment for the team. This usually means that the management cares about paying fair pay and fulfilling the duties. Trust and respect are important values in each organization.

What is negative retro pay?

Apart from retro pay and back pay, there is a negative retro pay. When a company overpaid an employee for the previous working period it is called negative retro pay. That means that the next payroll will be deducted from the amount of money that the employee owes to the company. Negative retro pay occurs when some deductions have not been included or more supplements have been added. Human factors can undoubtedly play a role in negative retro pay and also be an explanation for mistakes.

Tips for avoiding retro pay

1. Providing effective communication between the HR department and the other departments. Smooth and transparent communication is key for resolving any disputes. When an employee can freely ask about the detailed breakdown of the salary and track the hours worked, then, the frequency of mistakes decreases. 
2. Outsourcing to the payroll professionals. There are plenty of payroll providers and software that have expertise in calculating taxes and salaries. This is the best solution for organizations that value competence because automated payroll processes reduce the human factor. State-of-the-art technologies and advanced security measures are the additional advantages to opting for outsourcing. 
3. Accurate record-keeping and regular financial audits. Consistent evaluation of the accounting and financial departments and holding regular meetings are two actions that pay off in the long term.  
4. Keeping an eye on ever-changing legal and regulatory updates. Minimum wage, overwork policy, service notice period, and other regulations are often being changed. Not missing a new update is crucial for preventing further financial implications. 
5. Receiving feedback. Some pricey mistakes can be avoided if the management personnel listens to the employees.Some concerns and suggestions may be unexpected to hear, but these practices form an ethical workplace and help make adjustments in the working processes. 

Conclusion 

Retro pay, back pay, and negative retro pay are not something unusual. It occurs in every business sooner or later. The typical reasons are miscalculations in deductions and supplements, software glitches, and misunderstanding of commission and bonuses. Fortunately, the outcomes of retro pay are relatively easy to fix.