Retro Pay, short for retroactive pay, refers to the additional compensation that is owed to an employee for work performed in a previous period but was not included in their regular paycheck. It arises when there are changes in employment terms, such as wage increases, adjustments, or corrections that are applied retroactively.

Example

For instance, if an employee's salary is increased effective from January 1st, but the updated pay rate is not implemented until February, the employee is entitled to receive retro pay for the period of January. The retro pay compensates the employee for the difference between their previous lower salary and the new increased salary for that specific period. HR departments typically calculate and process retro pay to ensure that employees are fairly compensated for any backdated changes to their pay rates or employment terms.