Retroactive pay, also known as retro pay, is a type of compensation that an employer owes to an employee for work performed during a previous pay period. Retro pay is used as a correction when an employee is paid less than they should have earned due to a payroll error or a delay in updating their compensation rate. Retro pay differs from back pay, which refers to compensation that makes up for a pay period where an employee received no compensation at all.

Calculating retro pay involves determining the difference between what an employee should have received and what they were actually paid. Retro pay can be any form of income that an employee was owed but did not receive, including salaries, hourly wages, commissions, and bonuses. Retro pay is typically counted as a supplemental wage, which describes any additional compensation.

Employers are required to pay employees accurately and promptly. When they don’t, their workers may be entitled to retroactive pay. If employees file a lawsuit, the employer may also have to pay an equal amount in liquidated damages, as well as attorney’s fees and court costs. Retro pay is subject to employment taxes, and the amount owed to the employee in gross wages is not the amount they will take home. Retroactive payments are typically issued to the employee on their next paycheck, but a separate paycheck can also be issued.

Examples of situations that might create a need for retroactive pay include:

• Payroll errors, such as forgetting to factor in overtime or failing to pay an increased rate for hours worked outside an employee’s normally scheduled shift.
• Accounting errors, such as a pay increase that was authorized but not reflected on the employee’s paycheck.
• Delayed payments, such as when a late-paying client delays funds for paying out commissions.

To calculate retro pay for hourly employees owed overtime wages, employers need to determine the difference between the employees regular rate of pay and the overtime rate, and then multiply that difference by the number of overtime hours worked. Retro pay for salaried employees is calculated by dividing the employees annual salary by the numb...