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.
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.