Retro Pay

The term retro pay stands for a compensation that an employee receives for work done in the previous pay period which has not been paid or underpaid at that time. Retro pay is mainly linked to the situations when the current employee's wage scale (such as a salary, a bonus or a correction of payroll errors) has changed and the adjustments are effective to a past period of time. Employers are mandated by law to pay back employees when necessary and this way employees are guaranteed fair compensation for their work.

Example of Retro Pay

Imagine the company does a new salary structure from January 1 with better salaries for selected job positions. On the other hand, administrational delays occur, and the employees will have to wait until March to see the actual adjustment in their salaries. Thus, they are entitled to retro pay for this period in order to balance the compensation.

The company uses this formula to calculate the retro pay: the difference per employee between the actual salary in the affected period and the salary he/she should have got according to the new salary rates. The retroactive adjustments are next processed and distributed to employees in their next paychecks along with a note about the retro pay calculations explaining them for transparency.