How to Calculate Retroactive Pay: A Step-by-Step Guide for Cannabis Businesses

In the dynamic and fast-paced cannabis industry, ensuring that employees are fairly compensated is not just a legal obligation but a cornerstone of maintaining trust and morale. Retroactive pay, or retro pay, comes into play when there are discrepancies between the hours worked and the wages received. Payroll errors are inevitable and can occur for various reasons, from administrative oversights to complex regulatory requirements. These mistakes often result in delayed payments, necessitating retroactive compensation. By issuing these adjustments, employers can ensure fair and equitable remuneration, especially when wage increases or adjustments are implemented late. In the cannabis industry, timely and accurate pay is crucial, ensuring compliance with legal standards and supporting employees who rely on a steady income.

What Is Retroactive Pay?

Retroactive pay, also known as retro pay, is the process of compensating employees for wages that were owed but not paid in a previous pay period. This adjustment addresses discrepancies between the hours worked and the actual compensation received, ensuring employees are paid accurately and fairly, especially when wage increases or adjustments are applied after the fact.

When Is Retroactive Pay Required?

Retroactive pay is required in various scenarios to ensure employees are compensated fairly for their work. Here are some common instances when retroactive pay must be issued:

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1. Administrative Errors

When payroll errors occur due to administrative oversights, such as incorrect data entry or miscalculation of hours, retroactive pay is necessary to correct these mistakes. These mistakes are most common with manual payroll and can be avoided by leveraging an automated payroll system. 

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2. Wage Increases

If a wage increase is approved but not implemented in the payroll system promptly, retroactive pay ensures that employees receive the correct amount from the effective date of the increase.

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3. Promotions and Position Changes

When an employee is promoted or changes positions and the new pay rate is not applied immediately, retroactive pay compensates for the difference from the date of the change.

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4. Overtime Miscalculations

If overtime hours are incorrectly calculated or missed, retroactive pay is required to compensate employees for the overtime they rightfully earned. As a reminder, overtime pay is usually paid at a premium rate. 

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5. Legal Compliance

In cases where legal requirements or collective bargaining agreements dictate specific pay rates or adjustments, retroactive pay ensures compliance with these regulations.

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6. Backdated Employment Changes

When employment changes, such as job role modifications or reclassifications, are backdated, retroactive pay covers the period from the effective date of the change to the present.

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7. Corrections After Audits

If payroll audits reveal discrepancies or underpayments, retroactive pay is issued to correct these issues and ensure employees are paid correctly.

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Issuing retroactive pay rectifies payment discrepancies and helps maintain employee trust and compliance with labor laws. It's crucial for employers, especially in regulated industries like cannabis, to promptly address and resolve payroll issues to avoid legal complications and ensure employee satisfaction.

Retroactive Pay and Labor Compliance

Several key laws govern retroactive pay in the US, like the Fair Labor Standards Act (FLSA) and state and local wage laws. The FLSA regulates minimum wage, overtime pay, and wage timing, ensuring employees receive correct overtime pay and retroactive adjustments if needed. Beyond federal rules, states and local municipalities may have their own laws on retroactive pay violations. 

For instance, as per U.S. labor law, employees are entitled to a higher pay rate when they work in excess of 40 hours per week. In this case, the employer must pay the employee the difference between their regular rate and the additional pay for working non-standard hours. Sometimes, this extra pay is not immediately reflected in the payroll, so retroactive pay is applied in the next payment cycle.

If retro pay is not provided when required, an employee can take legal action against their employer not only for the amount owed but also for issues such as discrimination, retaliation, or breach of contract.

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How is Retro Pay Calculated?

The formula for calculating retro pay is straightforward:

Retro Pay = Amount Owed – Amount Paid

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Determine the Correct Pay Rate

Check the employee's pay history and the reason for the adjustment. Make sure you have the correct pay rate for each affected period. Look into these details:

• Is the employee salaried or paid hourly?
• Is the employee exempt from receiving overtime pay?
• How many pay periods need to be reviewed?

Consult company records, contracts, and legal requirements to find the correct rate for each period.

Calculate the Difference

• Hourly Employees: Figure out how many hours were impacted by the incorrect rate. Multiply the difference in pay rates by the number of impacted hours to get the retro pay. Add this amount to the current paycheck. If the hours exceed 40 for the original time period, overtime pay should be added.
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• Salaried Employees: Calculating retro pay for salaried employees may be trickier. Identify the difference between their salary and what they should have been paid. Calculate their daily rate using the number of working days in the year. If you are having difficulty, then payroll software can be a huge help in getting accurate results. 

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Include Overtime and Benefits

When calculating retro pay, include any required overtime and benefits. For overtime, use the correct rate, which is usually 1.5 times their regular pay for the hours worked that exceed their normal 40 hours per week. Also, benefits like health insurance or retirement contributions can be adjusted based on the new pay rates. Ensure any percentage-based benefits match the retroactive pay changes. 

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Retro Pay and Taxes

Even though retro pay corrects a past paycheck, it must still be taxed. Retro pay is taxed just like regular wages. Use the percentage or aggregate method to withhold federal income tax, along with any state or local taxes, from the employee’s retro pay. If you issue a separate check for retro pay, it is still taxed the same way as regular pay.

Example of How to Calculate Retro Pay:

‍Assume an employee worked 40 regular hours and 10 overtime hours over two weeks. Their correct hourly rate is $20, but they were mistakenly paid $18. Overtime is paid at 1.5 times the hourly rate.

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Regular Hours: (20 - 18) x 40 = $80

Overtime Hours: (30 - 27) x 10 = $30
Overtime Rate is 1.5 x Hourly Rate

Total Retro Pay: 80 + 30 = $110

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This employee is owed $110 in retroactive pay.

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Best Practices for Implementing Retroactive Pay 

To avoid or reduce retroactive pay, you need proactive and strategic planning in HR management. Here are some best practices:

Transparent Communication

Transparency is key in any successful business — especially when it comes to pay. Explain the retroactive pay process, timelines, and compensation policies to employees, ideally in the company handbook. Pay transparency helps manage expectations and reduces surprises that could lead to retroactive pay issues. Give detailed paystubs so employees can easily spot errors or miscalculations. If you catch a mistake, inform the employee immediately, and ensure that they will receive retroactive pay on their next pay.

Accurate Record-Keeping

Keep correct and updated payroll records to avoid mistakes. Set up regular performance reviews to evaluate employee work and link salary increases to performance merits and market changes.

Use Payroll Software

Payroll software, like KayaPush's payroll platform, helps ensure accuracy and streamlines the payroll process. KayaPush's cloud-based software automates calculations for pay rates, overtime, bonuses, and taxes, providing quick and accurate payroll processing. It minimizes payment mistakes, leading to smooth operations and reducing the need for retro pay.

KayaPush’s comprehensive payroll software for cannabis businesses offers a range of benefits, including:

• Running payroll in 10 minutes
• Automated payroll calculations
• Flexible wage tracking
• Providing real-time payroll reporting
• POS integration for real-time labor vs sales
• Quick online access for employees
• Multi-location dashboard

But most importantly, KayaPush helps you stay up-to-date on labor laws and compliance.

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Legal Compliance

Regularly review labor laws and regulations to stay compliant. Keep up with changes in minimum wage, overtime, and other pay laws. KayaPush's HR+ can help you stay compliant by:

• Connecting you with live HR experts
• Sending you alerts and updates on changing employment laws
• Creating a state-compliant employee handbook with automatic updates and alerts
• Offering free HR resources and state-mandated training courses all in one place
  
  

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Avoiding Future Retro Pay Errors

Ensuring accurate and timely compensation through retroactive pay is essential for maintaining trust and morale within the cannabis industry. Retro pay addresses wage discrepancies, ensuring fair compensation for all employees. By understanding and correctly implementing retroactive pay, employers can avoid legal issues and foster a positive working environment.

Utilizing best practices such as transparent communication, accurate record-keeping, and advanced payroll software can minimize the need for retro pay. KayaPush offers a comprehensive payroll solution tailored for the cannabis industry, providing automated payroll calculations, real-time reporting, and HR compliance tools.

Ready to ensure accurate payroll processing, ensuring you avoid retroactive pay in the future? Learn more about KayaPush’s payroll software and take the first step towards hassle-free payroll management!