What is Retroactive Pay?

Definition: Retroactive pay is a sum of money owed to an employee for work done in the past as the result of wage rate modifications. It is a payment issued to compensate for a change in the negotiated rate where past periods must be recognized.

What Does Retroactive Pay Mean?

Retroactive pay, also called “retro pay”, is different from back pay, which is a payment issued to honor past commitments that for some reason weren’t fulfilled timely. A retroactive pay takes place when an employer has to pay a difference from past wages because of a newly set wage rate that affects those previous periods. This situations often happen when wage negotiations are taking place and past contracts are due, the negotiations might keep going for a while and when an agreement is reached the employer must honor the newly agreed rate retroactively.

In other cases, employees that got an illegal wage reduction can also apply for a retroactive pay. Normally, disputes over wage rate changes can be solved between the parties but in other cases employees can hire employment lawyers or have a government agent to review the case to see if there’s an illegal or unfair situation going on.

Example

Karla is an employee in a big supermarket that is located close to where she lives. The company’s workers decided to form a union to negotiate better wages and working conditions. Karla signed up for the union and they are currently discussing wage increases. Her contract expired two weeks after the negotiations started and she had to sign a contract with her old wage rate, since the new one hasn’t been settled yet.

After a few months, the union got a 12% wage increase to all workers like Karla. Since the contract negotiations started before her contract was renewed, the company had to pay her a retroactive pay for all the time that has passed since the negotiations started until this day.