What is retro pay?

Retro pay, also known as retroactive pay, is a form of payment made to an employee to make up the difference between what they were paid and what they should have been paid. Essentially, it is the correction of past underpayments to an employee. This type of payment can occur for various reasons, such as clerical errors, a pay increase, changes in an employment agreement, or overtime that was not adequately compensated.

Imagine a scenario where an employee is promoted with a pay increase effective from a specific date, but due to an oversight, their new wage rate isn't applied until a month later. This employee is owed a month's worth of increased wages, and that's where retro pay comes in. It compensates the employee for the difference between their old pay rate and the new, higher pay rate for that month.

Another case where retro pay is used is when a company recognises that employees have been wrongly paid or underpaid due to some payroll errors. In such cases, the company would retro pay the employee the correct amount and pay them what is due.

Ensuring compliance is paramount when offering retro pay, especially when dealing with a global team. Compliance, in this context, means adhering to the various labour laws, regulations, and rules that different countries have regarding retro pay. This is because labour laws vary from one country to another, and what might be legally acceptable in one country might be illegal in another.

For instance, some countries have strict regulations on how long a company can take to correct underpayments or how retro pay should be calculated. Not adhering to these laws could lead to penalties, lawsuits, or damage to the company's reputation. Hence, it's crucial to understand these laws and follow them to the letter when offering retro pay.

How can HR leaders manage retro pay in the workplace?

Here are some actionable steps that HR leaders can follow when dealing with retro pay:

Policy Development: Formulate a clear policy regarding retro pay that is in line with your company's principles and local labour laws. This policy should be accessible and understood by all employees.

Effective Communication: Communicate openly and transparently with employees about their pay, including any issues that might lead to retro pay. If employees understand the situation, it can prevent misunderstanding and dissatisfaction.

Regular Audit: Conduct regular payroll audits to ensure that employees are paid correctly. This can help identify and rectify any discrepancies before they become larger issues.

Legal Compliance: Familiarise yourself with local labour laws, especially those related to pay and wages, to ensure compliance. If necessary, seek the counsel of labour law experts.

Efficient Payroll System: Employ an efficient payroll system or software that can handle complex calculations and consider retro pay when necessary. This can reduce the chances of errors and ensure accurate and timely payments.

Retro pay is a crucial aspect of HR management that ensures fairness and promotes a positive working relationship between a company and its employees. By understanding its purpose and significance, and ensuring compliance with labour laws, HR leaders can manage it effectively, thus fostering a healthier, more trusting workplace environment.