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A retroactive pay adjustment, or retro pay, is a correction that pays an employee wages owed for work already performed in a prior pay period, typically after a late raise, a missed shift differential, an underpaid overtime calculation, or a payroll error.
Retro pay covers the difference between what an employee was paid and what they should have been paid. Common causes are a merit increase approved after the effective date, a promotion processed late, a missed shift or on-call differential, an incorrect hourly rate in the system, unrecorded hours, or overtime computed without including a nondiscretionary bonus. It is distinct from back pay, which usually refers to wages awarded to settle a claim or an agency finding.
Mechanically, retro pay is wages in the period it is paid. It is subject to federal income tax withholding, Social Security, and Medicare, and it should be identified as a separate line on the pay stub so the employee can see what was corrected and for which period. Employers may treat it as supplemental wages and apply the flat supplemental withholding rate, or aggregate it with regular wages. For nonexempt employees, a retroactive rate increase also increases the regular rate for the affected weeks, so the overtime premium must be recalculated and paid, not just the straight-time difference.
Timing carries legal weight. Several states require correction of an underpayment within a defined period or by the next regular payday, and unpaid overtime can support liquidated damages under the FLSA. Correct promptly, document the cause, and fix the upstream process, since the cost of payroll errors compounds when the same employees are shorted again.
A merit increase approved after its effective date, a late promotion, a missed shift or on-call differential, an incorrect rate in the system, unrecorded hours, or overtime figured without a nondiscretionary bonus. It corrects the difference between what was paid and what should have been paid.
As wages in the period it is paid, subject to federal income tax withholding, Social Security, and Medicare. The employer may treat it as supplemental wages and apply the flat supplemental rate or aggregate it with regular wages. Show it as a separate line on the pay stub.
For nonexempt employees, yes. A higher rate raises the regular rate for the affected weeks, so the overtime premium has to be recalculated and paid rather than only the straight-time difference. Correct promptly, since several states require correction within a defined period or by the next payday.