Retroactive pay: Overview, definition, and example
What is retroactive pay?
Retroactive pay refers to the money an employee is owed for work they have already done, but wasn't paid for at the time. This typically happens when there's a mistake in pay, a change in wages, or a late raise. For example, if an employee was supposed to receive a pay increase starting from a certain date but didn't, retroactive pay makes sure they’re paid for the difference between what they received and what they should have been paid.
Why is retroactive pay important?
Retroactive pay ensures fairness in the workplace by making sure employees are compensated correctly for the work they’ve already done. It helps maintain trust between employers and employees by correcting pay discrepancies. Without retroactive pay, employees might feel undervalued or shortchanged, which can impact morale and productivity. It’s especially important when pay errors are made, as it ensures employees aren’t penalized for something that was out of their control.
Understanding retroactive pay through an example
Imagine an employee has been working at a company for two years, but their pay raise was delayed due to an administrative mistake. The raise was meant to take effect six months ago. The company realizes the error and decides to pay them the difference in salary for the last six months, in addition to the current salary. This extra payment is retroactive pay.
Another example could be if a company accidentally overlooked paying overtime for employees working more than 40 hours a week. Once the mistake is discovered, the company would issue retroactive pay to cover the overtime pay the employees should have received.
An example of a retroactive pay clause
Here’s how a retroactive pay clause might look in an employment agreement:
“In the event of an error in compensation, the Employer agrees to pay any retroactive pay owed to the Employee. Retroactive pay will be calculated from the date the error occurred until the correction is made, and will be paid in the next payroll cycle.”
Conclusion
Retroactive pay is an essential part of ensuring employees are paid fairly for their work, even when mistakes happen. It helps employers correct errors in a transparent and fair way, maintaining good relationships with their team. If you're an employer, it’s important to have a clear process for addressing pay mistakes and issuing retroactive pay. For employees, understanding retroactive pay ensures you know how to address any compensation discrepancies that arise.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.