You have undoubtedly heard the phrase ‘words mean things’. That is certainly true in the arena of payroll processing. The HR and payroll industries often use very specific terms to define equally specific things. Mixing up those terms could lead to unwanted trouble. Good examples are the terms ‘back pay’ and ‘retroactive pay’. They are not the same thing.
BenefitMall is a Texas company that provides payroll processing and benefits administration to businesses across the United States. They deal with both back pay and retroactive pay on a regular basis. They say that knowing the difference between the two is important because the terms define different types of pay that an employee should have received but did not.
The differences are not terribly important in a practical sense. In terms of litigation or an investigation by the government though, the definitions of the two terms suddenly become critical. Employers and their HR and payroll personnel should, therefore, understand both back pay and retroactive pay.
Back Pay Explained
Back pay is defined as established pay an employee should have received but did not. For example, consider an hourly worker who makes $15 per hour for 40 hours of work. Let’s say that employee only received pay for 30 hours on a given week. The remaining 10 hours were excluded for one reason or another. The pay for that ten hours is considered back pay.
It is back pay because the employee was entitled to expected wages that were not received. It can be paid in the employee’s next paycheck or offered as a standalone payment. More often than not, back pay disputes involve things like wrongful termination, failing to pay overtime, or withholding wages as a means of punishing employees for improper conduct.
The term of ‘back pay’ is broad enough to apply to a full range of circumstances. On the other hand, retroactive pay is a bit more specific.
Retroactive Pay Explained
Retroactive pay also involves money an employee was entitled to but never received. However, the difference lies in the fact that the person eligible for retroactive pay received an amount the employer thought was correct even though it was not. Retroactive pay almost always involves pay rate increases that are miscalculated or not applied on the right date.
For example, an employee who received a 10% raise would expect to see that raise reflected in weekly pay beginning with the first payroll cycle following the implementation of the raise. If some miscommunication prevented the payroll department from applying the new pay rate on the scheduled date, any subsequent pay received to correct the problem would be considered retroactive pay.
Retroactive pay is determined by comparing both old and new pay rates and calculating the difference between the two. Usually it is a straightforward process. However, retroactive pay can quickly become a sticky issue when it is related to discrimination, breach of contract, violations of overtime pay regulations, or even retaliation against employees for certain kinds of behavior.
Do Not Take Any Chances
The differences between back pay and retroactive pay may seem insignificant from a practical standpoint, but the two terms exist because they represent different scenarios under which employees are not paid what they are owed. BenefitMall recommends employers not take any chances with either one.
Good payroll practices and adherence to all state and federal laws guarantees employers always pay their workers every penny they are due. That is the way it should be. Employers routinely struggling in this regard should seriously consider contracting their payroll to a third-party provider.