Factorial logo

Retro Pay

Payroll mistakes happen. All companies inevitably trip up from time to time. Most errors are easily fixed and have very few repercussions. However, shortfalls in an employee's pay can lead to more serious problems if not corrected as soon as possible. Retro pay, or retroactive pay to give it its full name, is one remedy for said mistakes.

Retro Pay What Is It?

Retro pay is a form of compensation added to a paycheck to cover missing monies from a previous pay period. Back pay is monies owed for one or many complete pay periods that are missing. Retro pay is usually paid within one pay period of the mistake.

Common Payroll Mistakes That Lead To Retro Pay

Typically mistakes made in paychecks are oversights and are easily spotted and quick to remedy. A few examples are

  • Miscalculating overtime: Either missing hours or forgetting to multiply by 1.5
  • Unscheduled shift changes: One example is working a night shift instead of a day shift and not getting the increased rate.
  • Bonus or Commission: There may be a delay due to late-paying clients or some form of retention. 
  • Pay raises: Another common mistake is not adjusting the pay rate after a pay rise.

Mistakes That Lead to Court Action And Subsequent Retro Pay

Mistakes like this are where things can get a little sticky. No company wants to face court rulings, but it can be a cost of doing business. Employees will occasionally take a firm to court for retro pay. Here are some scenarios: 

  • Discrimination: If there is any kind of favoritism or inequity in pay for a particular group, based on any protected status, be it race, gender, or age.
  • Unfair Disciplinary or Summary Dismissal: Breach of labor laws resulting in lost earnings, for example, firing a whistleblower.
  • Breaking contractual agreements: Remuneration not meeting levels set in the contract.
  • Unpaid Overtime: Probably the most common issue raised in court proceedings.
  •  Paid below minimum wage: The Fair Labor Standards Act (FLSA) sets out minimum wage requirements for non-exempt employees.

Working Out Retro Pay

If a court has ruled that an employee requires retro pay, they will usually set the compensation needed. However, if there is a simple mistake in the payroll, there are a few things to know before determining the amount of retro pay required. 

  • Salaried or hourly rate: Mistakes with salaried staff can be more complex and require a bit more  contractual information
  • Hourly rate/overtime rate: You will need to know how many hours an employee worked and at which rate to determine the amount of retro pay.
  • How many pay periods are affected: If more than one pay period is short, then payroll accounting will need adjustment further back.