It represents the difference between the actual amount paid and the amount that should have been paid to the employee during the specified period. Retro pay gets initiated for many reasons, including salary adjustments, promotions, incorrect salary calculations, or the resolution of a pay dispute.
When an employee’s pay rate is modified, the employer must review and update the individual’s compensation to reflect the new rate, which may apply to past and future pay periods. This can be particularly important when a pay increase results from salary negotiation, promotion, or annual pay review. In such cases, retro pay ensures that the employee receives the correct amount they are entitled to, based on the updated pay rate.
Retro pay is also required when there are errors in payroll calculations or data entry, which lead to employees receiving incorrect wages. Employers have a legal responsibility to rectify the errors and provide employees with the outstanding amount they are owed. Retro pay aims to bridge the gap between what initial pay and what the employee should have received during the specified time frame.
In some instances, retro pay may arise from a wage dispute. When an employee or union successfully negotiates a pay increase, the new rate will be applied retroactively to a specific date in the past. The employee will then be compensated for the difference between their previous pay rate and the newly agreed-upon rate for the specified retroactive period.
It is important to note that retro pay is subject to taxation and other payroll deductions, just like regular wages. Employers are responsible for accurately calculating the amount of retro pay owed and making the appropriate adjustments to the employee’s payroll records, including tax withholding and contributions to benefit plans.