What is a retroactive payment?
If an employee was being paid in the wrong way for a job performed or if he received a salary increase that was made effective from a previous payment period, the difference in what was paid and what he actually received is called retroactive payment.
In general terms ” retroactive ” means that it takes validity from a particular point in the past. Some laws, such as the Spanish one, do not consider salary retroactive if more than five years have passed.
If you delay in making the payroll payment, it is recognized as accounts payable to employees. If you frequently keep back wages, the affected employee can file a wage claim with the US Department of Labor, Wages and Hour Division. Or before the Department or Ministry of Labor of the country where you work.
To prevent employees from adopting this kind of measure, it calculates and appropriately pays back wages retroactively.
When is a retroactive payment generated?
A retroactive payment is generated for several reasons. The most common when they are not applied or when working conditions are delayed.
For example, a retroactive payment can take place when an increase in salaries is decreed by the government, effective from previous months or when a contract or collective agreement is discussed and approved.
A collective bargaining agreement may lapse on December 31, however negotiations between the unions and the employer may take several months the following year.
A frequent case is that the collective agreement is approved and promulgated on May 1, so that employees must receive salary differences between the approved and actually collected from January to May, via retroactive payment.
An error in the fulfilment of a contract may result in a retroactive payment. Classification in a lower labour category, an undue overtime payment.
A disadvantage of retroactive payment is that it may be subject to taxes and must be declared within the amount received for work purposes for the current fiscal year.
In inflationary economies, the retroactive payment can play against the employees, because the purchasing power of that money will have lost value as well as the accumulated inflation during the time that the payment was delayed.
How to calculate a retroactive?
Calculation of general incomplete payment
If you simply calculate the retroactive payment generated as the incomplete payment of wages, you must subtract what the employee has actually received from what he should have received.
For example, if you made a mistake and paid US$ 450 for the week, instead of US $ 500 and the worker agrees to wait until the next pay period to receive that difference, only subtract $ 500 minus $ 450 and pay US$ 50 in retroactive, along with your current salary.
Retroactive payment per hour
Calculate the retroactive payment for employees per hour, based on the increase in the payment rate.
For example, the employee received a salary increase of US$ 10 to US$ 11 per hour, effective for the biweekly pay period before the current one. If you work a standard 40-hour workday per week, this equals 80 hours each biweekly pay period.
Then the old fortnightly salary is US$ 10 x 80 hours = US$ 800.
The new biweekly salary product of the increase is: US$ 11 x 80 hours = US$ 880
The retroactive payment for the last biweekly work period will be US$ 880 – US$ 800 = US$ 80 that will be paid as retroactive in addition to the regular salaries of US$ 880 to each employee to whom this amount is owed.
Retroactive payment of employees
Calculate the retroactive payment for employees based on a salary increase.
For example, the employee received a 3% wage increase, used to earn $60,000 a year and the salary increase is effective for the last two weekly payrolls.
New annual salary: US$ 60,000 x 1,03 (the base plus 3%) = US$ 61,800
Old weekly salary: US$ 60,000 / 52 weeks = US$ 1,153.85
New weekly salary: US$ 61,800 / 52 weeks = US$ 1,188.46
Retroactive payment of the last two weekly payment periods: US$ 1,188.46 – US$ 1,153.85 = US$ 34.61 x 2 weeks = US$ 69.22 paid in addition to the current salary of the employee of US$ 1,188.46.
Advice for tax purposes.
To reduce the withholding of federal and state income taxes from employees, you can pay the owed wages in a separate check from your regular paycheck.