Calculating Retroactive Pay
If you discover a payroll error or are alerted to one by an employee, you’ll want to resolve it ASAP. How you calculate retro pay depends on how you classify the employee affected—retro pay is computed differently for salaried employees and hourly employees.
How to calculate retro pay for hourly employees
Calculating retroactive payments for hourly employees is relatively straightforward. To begin, you’ll need to determine what you did pay the employee for the hours they worked. For example, if an employee worked 40 hours but you only paid them for 35, you owe them 5 hours’ worth of their regular pay.
Once you’ve determined the difference in hours paid and owed, you’ll need to identify the hourly rate you’ve agreed on—let’s use $15/hour for this example. When you multiply (5) hours x ($15) hourly wage, you’ll find that you owe them $75 in retro pay.
Typically, retroactive payments are added onto the employee’s next paycheque. So don’t forget to add the amount owed in retro pay to the number of hours worked during the current pay period. We’ll discuss other ways of issuing retro pay a little later on in this post.
How to calculate retro pay for salaried employees
Salaried employees are usually issued the same amount on each paycheque earned, so figuring out their retro pay is also quite simple. If your salaried employee is supposed to be paid $2,100 per paycheque but they only received $1,650, you owe them $450 in retro pay.
Keep in mind that retro pay may be used in a variety of circumstances, including retroactive pay increases. A retroactive pay increase occurs when an employee receives a pay raise but the new pay rate is not reflected on the appropriate paycheque.
For example, let’s say an employee currently earns $60,000 per year and they recently got a raise. The employee discovers that their most recent paycheque shows their old rate of pay even though the new rate was supposed to go into effect. Their new annual salary should be $65,000 in gross pay. You’ll need to determine how much they should be paid on each paycheque with their new rate, then subtract the old rate to find the difference. Once you’ve determined the difference, you can issue retroactive pay accordingly.