Retroactive pay is money owed to the employee for work they already performed but paid at a lower rate. In other words, these payments reconcile the difference between the rate an employee should have been paid and the rate an employee was actually paid. 

It usually occurs when an employee receives a raise and it has not been adjusted in the pay period yet. Other circumstances that give rise to retroactive pay would include missed payroll payment and accounting mistakes. 

When Can the Court Order a Retroactive Pay For the Employee?

A court can issue an order for a retroactive pay if the employer is guilty of: 

  • Discrimination: This is when one small group of people is preferred over another. For example, a raise is only given to all the men employees and excludes the women;
  • Breach of contract: This occurs when a business purposely breaches an employment contract and pays less than the negotiated rate; 
  • Retaliation: This can occur when employers fire an employee because of whistleblowing; 
  • Failure to pay overtime: This is one of the most common violations, also known as overtime violations; 

Also, if an employer pays lower than minimum wage off the books, it is considered illegal, as is paying the employer less than minimum wage. 

How Do I Calculate Retroactive Pay?

Some basic questions need to be figured out in order to calculate the retroactive pay: 

  • Is the employee hourly or salaried?
  • Does overtime apply to the employee, or do overtime hours have to be considered?
  • How many pay periods does the retroactive pay affect?
  • Will you need to fix payroll accounting on the back-end?
  • Was the retroactive pay caused by missed hours, that may affect overtime calculations and need to be paid at overtime rates, or is there only a discrepancy in the pay rate itself?

In the majority of cases, even when using the best payroll software, retro pay has to be calculated outside of the regular timekeeping system and manually inserted as miscellaneous income into the payroll system.

What is the Difference Between Back Pay and Retroactive Pay?

States vary on the laws surrounding back pay and retroactive pay. Generally, they both involve paying an employee past wages. Back pay is payment you owe an employee when you did not pay them their wages. It is basically when you pay an employee missed wages that you should have paid them in the first place. These include some circumstances in which an employee may receive back pay for:

  • Unpaid wages including bonuses;  
  • Missed overtime pay; 
  • Commissions; and
  • Missed hours.

According to the U.S. Department of Labor, a two-year statute of limitations applies to recovering back pay wages. However, in the case of willful violations, a three-year statute of limitations is applied. Retroactive pay is utilized to correct an employee’s rate of pay or salary for previous wages. Retroactive pay operates in the following situations: 

  • Forgotten raises;
  • Payroll errors; and
  • Miscalculations for overtime.

You can pay an employee back pay if you forgot to pay them for overtime, the right amount of hours, or for a bonus or commission. There are some options available to do this. When it comes to paying employees retroactive wages, you can add retroactive payments to an employee’s regular wages on their next check. Alternatively, you can provide retro pay as a separate payment on a different paycheck.

What are the Federal Regulations Regarding Retroactive Pay?

According to the Department of Labor Wage and Hour Division, employees must be paid each pay period and no later than 12 days from the end of the pay period. However, states differ on labor guidelines like minimum wage, the frequency and length of pay periods, records retention, and whether to give paycheck immediately upon termination. 

The retroactive pay must be paid as soon as possible to ensure compliance with the federal and state labor laws. In most states, this comes down to writing the employee a separate check or paying them the retroactive pay due on the incoming next pay period.

Negative retro pay is compensation employers overpaid to employees but then later decided to take it back. Different states like California, New Jersey, Texas, Illinois, and Washington have certain conditions under which an employer can take back money that has already been done and incorrectly paid for at a higher rate. 

However, some states will not permit this at all. For example, Texas requires an advanced notification before pay can be decreased. Furthermore, Illinois has employer penalties for late payment of wages, failure to provide a final check on time or failure to pay out earned vacation.

When Do I Need to Contact a Lawyer for an Issue with Retroactive Pay?

If you think there has been a mistake in your payroll and need some guidance on figuring out how to communicate with your employer it may be useful to contact an employment lawyer for more assistance. Your attorney can provide representation, legal advice and guidance for your case.