In simple words, Retroactive pay (retro pay) is a payment made to an employee to decrease the margin between what was paid and what should’ve been paid. It can occur when you increase an employee’s salary in the middle of a pay cycle; or when they earn a bonus in a prior to their pay period.
Calculating Retro Pay
The preliminaries however include self-questioning about your employee payroll in your company and the timeframe they were paid in.
But there are also other questions you can ask yourself:
- Hourly employees or monthly employees? (so that you know which pay rate to use)
- Is the employee exempt from overtime, or do overtime hours have to be considered?
- Does the retroactive pay affect only one pay period or more than one pay period?
- Was the retroactive pay caused by missed hours, which may affect overtime calculations and need to be paid at overtime rates, or only a discrepancy in the pay rate itself?
Calculating Retro Pay for Hourly Employees
To determine retro pay for an hourly employee, you’ll need to calculate the amount paid wrongly based on hours; and then calculate the rate. You’ll then have to multiply the differential rate by the hours paid incorrectly to calculate the retroactive pay amount.
Example: 60 hours were paid to Andrew last pay period using the wrong pay rate of $20 an hour. The correct pay rate should have been $24 an hour.
Here’s how to calculate the retroactive pay the company owes Andrew:
- Calculate the difference between pay rate paid and the actual pay rate:
$24 correct pay rate – $20 incorrect pay rate = $4 an hour difference
- Multiply the differential pay rate with the number of hours paid wrongly:
$4 pay rate difference x 60 hours paid incorrectly = $240 owed in retro pay
$240 is the gross amount of retro pay the company owes Andrew.
Calculating Retro Pay For Monthly Salaried Employees
In comparison to hourly employees, calculating retroactive pay for salaried staff proves to be a little more difficult. You’ll need to know the difference between the annual salary the employee was paid and the salary that should have been paid. For that to go further, you should be able to verify the number of payroll days in the year.
Example: Sasha’s annual salary was increased from $72,400 to $75,000 a year based on her performance review and should have taken effect at the beginning of the month. However, the month began a few days into the pay period, so her last paycheck was paid at the old rate of $72,400, when in fact 10 days in that pay period should have been paid at the new rate.
Here’s how to calculate the retro pay the company owes Sasha:
- Calculate the difference between the annual salary rate at which the employee was paid versus the actual annual pay rate.
$75,000 – $72,400 = $2,600 a year difference
- Divide the salary difference by the number of payroll days in the calendar year to calculate the inconsistency in pay by day.
$2,600 salary difference ÷ 251 paydays in the calendar year = $10.35
$10.35 is the pay discrepancy by day
- Multiply the daily pay inconsistency rate by the number of days paid incorrectly to calculate gross retroactive pay amount due.
$10.35 x 10 days = $103.58
$103.58 is the gross amount of retro pay the company owes Sasha.
Federal Pay Laws
The Department of Labor (DOL) Wage and Hour Division states that employees must be paid each pay period and no later than 12 days from the end of the pay period.
States vary on labor guidelines like minimum wage, the frequency and length of pay periods, records retention, and whether or not a paycheck must be provided immediately upon termination.
Similar to regular pay, retroactive pay needs to be paid as soon as possible to ensure federal and state labor law compliance. In most states, this means cutting the employee a separate check or paying them the retro pay due on the very next pay period.
Processing Retroactive Pay
There are many reasons for retroactive payments; but the most prominent one is data errors in the payroll software.
If you really want to manage your payroll without any errors, then you are supposed to use and efficient payroll software.
The retro pay processing includes reviewing the retro pay requests whether it is valid or not. Once the request is validated, the amount of payment is calculated before reviewing the results and overriding them, if necessary. The system then updates the employee data accordingly.
Several payroll software also provide payment sheets so you can review them as the last re-confirmation.
Time Tracking Tools That Make Calculating Retro Pay Easier
The huge obstacle while calculating retro pay is not the calculations but the time tracking. You might have an idea about how much to pay your employees but not with the time that went by.
Hence, make sure to find a software that integrates your payroll with a time tracking device. The time tracking devices calculate the amount of hours your employee worked in turn making it easier to compute the retro pay.
Few of the best tools that might serve your company are:
1) Hubstaff
Hubstaff is a time tracking system which holds payroll as the prime feature. Employees are entered in the system while mentioning the pay format. It provides hourly, weekly, bi-weekly and monthly formats.
Not only it tracks the time period of employee’s work, but also provides a specific module which contains the total amount to be paid and if it was successful or not.
2) Homebase
Homebase can be integrated with various payroll software in compatibility with the scheduling features it offers.
You can make schedules of your employees which can in turn reduce the payroll errors.
This time tracker tool can be integrated with various top payroll software Gusto etc.
3) Time Doctor
This time tracker tool is integrated with the payroll feature within. Time Doctor allows you to enter the employee details for further payment methods.
You have the liberty to choose the payment method among given options. With this software, you can either enter total amount or you can calculate the amount per hour.
4) Clockodo
Clockodo handles attendance of the employees working in your company including their sick leaves, day offs and working hours etc.
It integrates your payroll department with the excel data so you get accurate information regarding the time stamps.
5) Clockshark
Clockshark is another time tracker that integrates with various Payroll software like Quickbooks, ADP and Sage 100.
This tool offers various features like employee scheduling to help your workforce be in track, paid time off, reporting the working hours of each employee, current workforce details and so on.
Bottom Line
There is a high chance that Retro Pay situations may arise in every organization. And it happens to be the company’s responsibility to handle such issues before they become bigger.
Nevertheless, you can still add the current month’s retro pay to the employee’s next month salary.
In order to avoid retro pay situations, any payroll software that could be integrated with timekeeping is recommendable.
