Retro Pay Meaning | How to Calculate Retro Pay?

What Does Retro Pay Mean?

“Retro pay,” short for “retroactive pay,” refers to a payment made to employees for work they’ve already done but weren’t paid for at the time of the work. This could happen when the employee was not paid because of an administrative error, a salary increase that was not applied in time, or a delayed pay raise.

It is the distinction between what an employee receives and what they should have paid. Once the difference is discovered, it usually comes in a lump sum.

How to Calculate Retro Pay?

Retro pay calculation is the process of determining the difference between an employee’s current pay and what they should have received at a certain time.

Here’s a step-by-step guide on how to calculate retro pay:

Step 1: Identify the Effective Date of the Pay Change

Find out the date at which the employee is expected to receive the correct rate or pay. It could be the date of the promotion, raise, or correction to an earlier mistake.

Step 2: Determine the Correct Pay Rate

Find out the correct rate of pay that the employee must receive. It can be an hourly salary or some other type of compensation.

Step 3: Calculate the Correct Pay

Calculate the amount an employee should be paid from the day of the pay increase to the current date.

Step 4: Calculate the Pay Actually Received

Determine the amount an employee was paid at the same time.

Step 5: Subtract the Actual Pay from the Correct Pay

Subtract the amount an employee actually received from the money they should have received. The difference is retro-pay due to the worker.

Example Calculation

Let’s suppose that a worker was scheduled to receive an increase of $20 to $25 per hour on January 1. However, the increase wasn’t implemented until March 1. The employee was working 40 hours a week.

Determine the underpaid period: January 1 to March 1 (8 weeks).

Calculate the correct pay:

$25 per hour * 40 hours per week = $1,000 per week.
$1,000 per week * 8 weeks = $8,000.

Calculate the pay received:

$20 per hour * 40 hours per week = $800 per week.
$800 per week * 8 weeks = $6,400.

Calculate retro pay:

$8,000 (correct pay) – $6,400 (actual pay) = $1,600 in retro pay.

The employee would be owed $1,600 in retro pay.

What is Retro Pay on a Paycheck?

Retro pay refers to the amount an employee is paid to make up the underpayment that occurred during prior pay periods. The adjustment is then added to the current pay period to cover the difference between what an employee actually received and what they ought to have received.

When Retro Pay Might Appear on a Paycheck:

Salary Increase: When an increase was scheduled to be effective in an earlier pay period but was not applied, retro pay will cover the difference in those periods.
Promoting: If an employee were promoted, it would be at an increase in pay that was not reflected in previous paychecks.
Corrections: If there was a mistake in the calculation of pay, for example, the wrong calculation of working hours, a wrong hourly rate, or overtime payments not paid.
Retracted Pay Agreements: occur when an increase in pay is discussed or agreed to after the fact but retroactively applied to work times.

How It Appears on the Paycheck:

Retro pay is an additional line item in the paycheck often identified with the words “Retro Pay,” “Back Pay,” or something similar. It shows the extra amount that the employee will receive to make up for the underpayments from the prior period. The remainder of the pay will include the regular salary for the current time.

This guarantees that employees are fully paid for the work they have done according to the appropriate rate of pay or agreement.