What is retro pay? And how to calculate it

Whether hourly or salaried, employees expect accurate, timely pay when they get a pay rate boost. But that doesn’t always happen.

Payroll systems make errors once in a while—even for the most organized accounting teams. That’s what retroactive pay is for. If a company ends up owing a portion of an employee’s wages, retroactive pay, or retro pay, makes up the difference. 

What is retro pay?

Sometimes, payroll makes a mistake and doesn’t pay an employee the total of their wages, typically after a rate increase. If this happens, they give that employee retro pay so they receive what they’re owed. 

This supplemental pay can be days, weeks, or even months after the original work was performed—whenever someone flags the issue. It’s usually added to the employee’s next paycheck or given as a one-time payment.

How to calculate and process retro pay

Generally Accepted Accounting Principles (GAAP), which are endorsed by the U.S. Securities and Exchange Commission (SEC), outline when and how to give an employee retroactive pay. GAAP also applies to any other payment behaviors, so it’s important to be familiar with its standards.

Here are two scenarios that explain retro pay for hourly employees and salaried staff.

Hourly staff

Let’s say an hourly employee was getting a raise in their hourly rate from $15 to $16.50. They were supposed to get that raise two biweekly pay periods ago. The accounting team has to pay them for the hours they worked: 180 hours, 90 hours per pay period.

To calculate retro pay here, include:

• Their previous hourly rate ($15)
• Their new hourly rate ($16.50)
• The effective date of the pay increase
• The total number of hours worked at the old rate

This means you have to:

• Calculate the hourly increase amount ($1.50 in this case)
• Multiply the total hours worked at the former rate by the hourly increase (180 hours multiplied by $1.50 = $270)

With these numbers, the hourly employee should get $270.

Salaried staff

Imagine you gave an employee a 6% salary increase—from $58,000 to $61,480. This annual salary boost wasn’t properly calculated in their last biweekly paycheck. That means they need to be paid for two weeks of full-time work. 

To calculate retro pay, include:

• Their previous annual salary ($58,000)
• Their new yearly salary ($61,480)
• The effective date of the salary increase

Then:

• Calculate their original biweekly salary: $58,000 divided by 26 (the number of biweekly pay periods in a year), which equals $2,230.77
• Calculate the new biweekly salary using the same method ($2,364.62)
• Find the difference in biweekly salaries by subtracting the original biweekly salary from the new biweekly salary to get the difference between these numbers ($2,364.62 - $2,230.77 = $133.85)
• Multiply by the number of biweekly periods affected (because it’s just one pay period, the total remains $133.85)

The salaried employee should get $133.85.

Retro pay vs. back pay: What’s the difference?

Retroactive pay happens when an employee doesn’t receive the total of their pay, typically due to a mistake when calculating a pay raise. The company paid them for their old rate, and now needs to give them the difference of what they should have earned. 

Back pay is another important process that happens when an employee doesn’t get what they’re owed—but for different reasons. Back pay usually concerns overtime pay, withholding taxes, or other errors. 

Why might you need to process retro pay?

Here’s why a company might need to give someone retroactive pay:

• Payroll errors: Sometimes, incorrect data input or miscalculations by payroll teams and payroll software lead to employees receiving inaccurate pay.
• Salary adjustments: Delays in approved pay raises in the payroll system can necessitate retroactive compensation.
• Promotions or job reclassifications: A pay rate increase accompanying a promotion or job change might take time to update in the payroll records.
• Overtime pay adjustments: Inaccuracies in the payroll process of calculating overtime could result in wages owed to employees.
• Commission or bonus discrepancies: Occasionally, the initial computation of sales commissions or performance bonuses may not align with the agreed terms, requiring later correction.

Simplify international payments with Oyster

Retro pay can be an administrative hurdle, but it doesn’t have to be complicated. Oyster simplifies the process.

With Oyster, retro pay is less likely, and if it does happen, Oyster knows what to do. 

Plus, you can streamline the payroll process, establish clear compensation policies, and pay employees around the world—in over 180 countries. 

Maintain compliance and pay employees accurately wherever you are. Grow with Oyster today.