What is a Retroactive Pay?

Updated

By

Reviewed by

Share:

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest

Ever been in a situation where you were short paid? Well, some employees fall under this category. Lucky there is a way to go about refunding the unpaid money.

When an employer pays an employee less than usual in a pay period, or a payroll mistake occurs, retroactive pay is used to compensate the employee. In this article, we will be reviewing what retroactive pay is and how it is calculated. 

Retroactive Pay in Canada

Also known as retro pay, Retroactive pay is compensation that is added to the paycheck of an employee to compensate for a shortfall in a prior pay period. It might also be compensation for other payroll or workplace ethical problems. Generally, retro pay is used to rectify payment mistakes.  

In fact, employees can charge their employers to court in demand for retro pay. Retroactive pay is often mistaken for back pay, but they are not the same. Unlike retro pay paid to compensate for short payment, back pay is paid to employees who received no payment at all. 

Retroactive pay must be calculated and sent out as soon as possible to keep employees satisfied and adhere to Canadian labour laws. Retroactive pay is backed legally.

When a Retro Pay is Required

Different situations may warrant retro pay and some of them include;

  • Pay Raise

If an employee gets a raise in wages or salary and doesn’t reflect on the paycheck, a retro pay arises.

  • Miscalculations in wages and overtime earnings

It is prevalent to miscalculate wages and make payroll mistakes. The same thing applies to overtime earnings. When any of these miscalculations happen, they can be corrected with retroactive pay.

  • Shift Differentials 

A shift differential is an amount paid to an employee or worker for working outside a standard scheduled time or shift. If this is not included in the paycheck, retro pay is needed to make up for it.

  • Multiple Positions

An employee may be working in two or more positions, and each role may have different wage rates. In this situation, it is easy and common to use the wrong pay rate in payroll calculation. When such happens, retro pay will be used to compensate the employee.

  • Commissions and Bonuses

Sometimes, commissions aren’t paid to employees until customers or clients pay, and wages may have been paid before that happens. This will require retro pay. The same applies to bonuses that may be deferred till a later pay period.

The legal situations that can warrant retro pay include:

  • Biased Treatment

If an employee is discriminated against based on race, gender, age or other factors, he or she may receive compensation in the form of retro pay.

  • Breach of Contract

When an employer breaches the contract of employment or a contract, he or she or the company may be charged to court. Retroactive pay will suffice as compensation.

  • Violating Labour Law

When an employer violates labour laws like the Minimum wage law, retroactive pay can be used as a penalty.

Calculating Retroactive Pay

Retroactive pay is often calculated manually and added to the next pay period of the concerned employees. In calculating retro pay, some factors should be considered;

  • The type of compensation (hourly or salaried)
  • If the employees are exempted from overtime or benefit from it
  • The number of pay periods affected

Generally, retro pay is calculated by deducting what the employee received from what he or she should have received while considering the factors above. Employers are required to withhold and remit payroll and income taxes on retroactive pay. They are also required to pay the employer portion of payroll taxes. 

There are two methods to pay retro earnings; they are:

  • Regular wages

You can add retro payments to an employee’s regular wages.

  • Standalone payment

You can decide to make it a standalone payment.

Regardless of whatever method you use, ensure that the employee knows what the retro payment is meant for. You can include retro pay on Paystub so you and your employee can have it on record. Note that the method you choose to disburse retro pay influences tax withholding.

Conclusion 

Retroactive pay is a means of compensation for employees who are not paid their deserved wages or salaries. Many situations can warrant retro pay in Canada, and employers can also be charged to court in demand for it. Tax is charged on retro pay, and it must be calculated and paid as soon as possible.

Related Posts

Post Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Essential reads, delivered weekly

Join the Financial Literacy Train. Get the latest financial information delivered right to your inbox.

Newsletter

Deals and Offers

We’ve rounded up the Best life in Canada, with the best promotions, and the best sign-up bonuses, to help you maximize your benefits.

EQ Bank US Dollar Account

Earn more on your US dollars

World Elite Mastercard

A card for travelling with exclusive perks

Platinum Mastercard

Earn 1 point for every dollar spent

Reviews

Post Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Advertiser Disclosure

Canada Buzz is an advertising-supported blog. Some products and services that appear on this site are from companies from which Canadabuzz receives compensation. We may alter brand placements on our website to amplify our partners and their offers. Any time you click to our partner websites or register for a product or services through an affiliate link on our website, we may earn a commission at ZERO cost to you.

Canada Buzz is a purely informational blog. Opinions expressed on this blog are NOT endorsed by the reviewed brands. The information provided on this website does not constitute financial or professional advice. However, our team strives to bring you quality, unbiased information.

Bukola

Highlights

Avid researcher, freelance writer, and personal finance enthusiast passionate about financial education and literacy.

Latest Post

Kareena Maya

Personal Finance and Travel Rewards Expert Contributor

Highlights

Experience

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.