Under employment laws, retro pay means money owed to an employee for work they have already performed, but were paid at a lower rate. Retro pay, or retroactive payments, are intended to reconcile the remaining difference between the employee’s rate of pay and what they were actually paid upon completing the work. This is not the same as back pay, which will be discussed in more detail later on.
Generally speaking, an employee would receive retroactive payments because of a payroll error. Another example of retroactive pay would be when an employee receives a raise, and that raise has not yet been adjusted for the pay period. Accounting mistakes may also necessitate retroactive payments.
It is important to note that retroactive pay can be mandated; meaning, it is sometimes mandatory by court order. A court may order an employer to provide their employee with retroactive payments under the following circumstances:
- Workplace discrimination;
- Violations of state overtime laws;
- Employer retaliation, such as when the employee reports the employer for various workplace violations;
- Paying less than the state or federal minimum wage, whichever is more generous; and/or
- Breaching a contract, such as an employment contract.
Employers should take care to avoid the need for retroactive pay, by ensuring all clerical and/or accounting errors are corrected in a timely manner. Additionally, following all state and federal workplace laws will be essential when dealing with retroactive pay. It is absolutely imperative that employees are paid correctly, and on time.
How Does Retroactive Pay Work? How Do I Calculate Retroactive Pay?
When an employee is paid retroactively, their employer will generally issue a check for the amount that is owed. This check would be separate from the employee’s usual paycheck. However, depending on the amount owed, some employers will roll the retro pay into the employee’s next scheduled paycheck.
It is imperative to note that state laws governing retroactive pay can vary widely, and employers will need to adhere specifically to their state’s laws. An example of this would be how in some states, such as New Mexico and Texas, state employees are not allowed under any circumstances to receive retroactive payments. This extends to include instances where an accounting or payroll error was made.
Other states, such as California, allow employees to sue their employer if their pay statements do not include the exact dates for which they were paid. As such, employers in these states should be very careful to include dates when issuing a retroactive paycheck.
In order to calculate retroactive pay, there are some different factors that must be considered by the employer. Some examples of such factors include, but may not be limited to:
- The employee’s type of compensation, meaning, hourly vs. salary;
- If the employee qualifies for overtime pay, and if so, are there overtime hours to be taken into consideration;
- The number of pay periods that are affected by the retroactive payment;
- Whether you will need to correct any payroll and/or accounting errors on the backend;
- Whether the retroactive pay was necessitated by retroactive hours which may affect overtime calculations, and must be paid at overtime rates; and
- Whether the retroactive pay was necessitated by a discrepancy in the actual pay rate itself?
Generally speaking, retroactive payments must be calculated outside of the company’s usual timekeeping system. As such, they must be manually inserted into the payroll system as miscellaneous income.
What Is the Difference Between Back Pay and Retroactive Pay?
As previously mentioned, there are some differences between back pay and retroactive pay. Although some use the terms interchangeably, back pay and retroactive pay are actually two different concepts.
Back pay refers to a situation in which an employee does not receive their due pay from their employer. These are amounts that the employee should have been paid, but instead, received nothing. An example of this would be an employer paying their employee missed wages, as the employee should have received them in the first place.
An employee may be entitled to receive back pay under the following circumstances:
- Unpaid wages;
- Unpaid bonuses;
- Sales commission pay; and
- Missed hours.
The U.S. Department of Labor has stated that there is a statute of limitations placed on recovering back pay wages. This statute is two years. This means that if the employee fails to assert their claim for back pay within two years from the date they were supposed to receive the pay, they may not be able to recover their back pay.
The reason behind the statute of limitations is that the documentation evidencing the failure to properly pay the employee may be destroyed after that time, or the management/staff of the employer may have changed. However, in cases involving willful wage violations, the statute is extended to three years.
Alternatively, retroactive pay is used to correct an employee’s rate of pay. It may also be used to correct their salary for previous wages. To reiterate, retroactive pay is generally dispersed in the following circumstances:
- Forgotten or oddly timed pay raises;
- Payroll and/or accounting errors; and
- Overtime pay that was incorrectly calculated.
What Are the Federal Regulations Regarding Retroactive Pay?
There are both federal and state regulations in place regarding retroactive pay. Some differences between state regulations have already been discussed.
In terms of federal regulations, the Department of Labor Wage and Hour Division has stated that employees are to be paid each pay period. Additionally, employees are to be paid no later than twelve days from the end of the pay period. However, state regulations differ in terms of labor guidelines. Some examples include, but may not be limited to:
- Minimum wage rates;
- Frequency of pay periods;
- Length of pay periods;
- Recordkeeping and retention; and
- Whether paychecks are to be immediately issued in the event of employment termination.
In order to comply with federal labor regulations, retroactive payments are to be made as soon as possible.
Negative retroactive payments refers to compensation that employers have overpaid to employees, and later decided to take back. Some states maintain certain conditions in which an employer can take back money they have incorrectly paid at a higher rate. California, Illinois, New Jersey, Texas, and Washington are some of these states. However, some states do not permit anything like this.
When Do I Need to Contact a Lawyer for an Issue with Retroactive Pay?
If you are experiencing any sort of issue or dispute with retroactive payments, you should consult an experienced and local employment lawyer. As you can see, state laws can vary greatly in terms of labor and wage laws. An experienced and local employment attorney will be best suited to understanding your state’s specific laws, and how those laws will affect your legal options moving forward.
Employment attorneys serve both employers and employees as needed. They can address both federal and state violations. One important function of an employment attorney is to protect the rights of their employee clients, and ensure that they are being treated fairly and consistently in the workplace. Additionally, when their client is an employer, they can help them remain in compliance with all applicable workplace laws.