Picture this: an employee receives a promotion that moves her into a new department and pay grade. Due to the promotion timing, the employee is eligible for a third of her new quarterly bonus. One problem, due to a manual error, her salary was changed but her pay grade wasn’t. She doesn’t receive her long-awaited bonus.
Enter retro pay. Retro pay is compensation that a business owes an employee for work performed during a previous pay period that wasn't paid accurately. That pay period may be the prior month, or it could be several prior pay periods.
Traditionally, payroll administrators and HR team members have handled retro pay manually by sifting through reports, running calculations, and adjusting budgets against calendars and pay periods using a number of disparate tools and systems. But the time-consuming practice takes focus off of higher value job tasks and still doesn’t eliminate payment errors, since even one miscalculation or errant keystroke could lead to more rework and confused, upset employees.
In response, HR leaders have increasingly turned to human capital management (HCM) systems to simplify retro payments, and reduce the time and effort it takes to get employees the exact and correct amount of money they’re owed.
Retro Pay mistakes create big headaches
On the surface, retro pays appear pretty straightforward — a simple correction of a previous error. However, payroll these days is anything but simple.
Businesses with a lot of hourly, seasonal, or temporary employees have to factor in considerations like shift differentials, overtime pay, or holiday pay. Meanwhile, full-time permanent employees often have scenarios like termination pay, performance bonuses, or promotions that can affect their paychecks and payroll records.
And in the age of the remote workforce—which has only increased during the COVID-19 pandemic—there are significant payroll issues when it comes to legal and tax compliance. With a dispersed workforce, it can take days or even weeks for the payroll and HR teams to learn that an activity requiring retro payment has occurred.
Research from the American Payroll Association and the Hackett Group found three top reasons for inaccurate payroll runs:
58% of companies say payroll receives termination paperwork too late
26% of companies say payroll isn’t told about leaves of absence
18% of companies say the incorrect pay rate is used
All of these issues and human errors require a retro pay adjustment.
Processing retro payments manually or through a legacy human capital management (HCM) system can lead to additional data entry errors that further delay payment and, in the eyes of an employee, make a bad situation even worse.
In some states, employers will also need to withhold state or local taxes. With a dispersed workforce, employers may need to follow payroll tax laws based on a remote workers’ location, not just the location of the business. These details are nearly impossible to track manually and legacy HCMs often don’t have the capacity to make appropriate tax distinctions either. Due to the complexity and the time required to fix manual or legacy HCM issues, many organizations simply end up writing off costly retro payment mistakes as an unnecessary and expensive cost of doing business.
The harsh reality and bottom-line impact of inefficient retro pay processes
The result of not doing retro pay work more efficiently or just opting to write it off has a direct impact on an organization’s budget, operating efficiency, and employee happiness. Three areas where a company will feel the impact of retro pay issues are in taxes, health benefits, and overall management of compensation and benefits budgets.
Budget management: As managers and leaders manage their departmental budgets and cost centers, retro pay issues can wreak havoc on the numbers. For example, if an employee moves from one department to another, but their pay continues to come out of their old department's budget, the management team can't see the actual labor cost for each department.
Depending on how the retro pay is applied, the records may never accurately reflect the exact timing for the payroll switch. In that case, the old department may be over budget and the new department under budget.
Health benefits and COBRA: Health benefit changes—such as the addition of a dependent to a health care plan—impact employee pay, as well as employer expenses. Unless those changes are entered within the current pay period, they won’t be reflected in the employee’s deductions. In that case, the employer will need to issue a retro pay adjustment based on the effective date of the updated policy. Similarly, when employees lose health coverage due to a qualifying event such as a termination or voluntary exit, the failure to offer COBRA benefits—because the organization doesn’t realize a COBRA-qualifying event has occurred—is a typical error, according to the Society for Human Resource Management (SHRM). Subsequently, they fail to offer COBRA and must correct it. SHRM says making those corrections is relatively complex (e.g., a lump sum premium for retroactive coverage or offering coverage going forward instead of retroactively) and often leads to additional errors.
Taxes: Employers often discover tax errors such as failing to withhold taxes on overtime, bonus, or commission wages after the end of the year in which they paid the employee. Correcting those errors is confusing and often creates opportunities for additional errors due to complex calculations. If the error is not caught early on, the organization may also be at risk for penalties and fines from the IRS.
Employee satisfaction: Perhaps the highest risk of ineffective or inefficient retro pay actions is employee engagement. Employees expect that they will receive correct compensation and benefits, even when there's a change in their status.
But failing to execute that update in a timely manner is a surefire way to alienate employees. In fact, nearly 55% of the American workforce is impacted by payroll problems, with almost half of the affected workers looking for a new job after experiencing two issues with their pay, reports HR Dive.
Receiving incorrect pay puts undue stress on an employee who has to spend time following up with managers and administrators to correct the error, which reduces their productivity and increases their level of anxiety and worry — especially if they’re like the majority of Americans who live paycheck to paycheck. Worse, when their pay is not accurate, employees will question if similar errors have occurred in the past, diminishing their trust in the organization.
Automating retro pays eliminates mistakes
In a dynamic business environment, it can be challenging to avoid retro pay situations completely. But what you can manage is how effectively and efficiently your organization handles complex payroll processes.
By using modern HR technology to automate the many aspects of retro pay processing, this costly pattern of writing of errors can be eliminated. Most HCMs will allow you to make a retro pay adjustment manually, but solutions that automate those steps streamline and simplify the process without the wasted time or user-driven errors.
Record changes based on an effective date. Most systems process a change on the date it's entered, not by the date it was effective. Others can only get as granular as the pay period it was entered, meaning that mid-period effective dates can add even more complexity to the calculation and that your reporting won't accurately reflect when the change took place.
Apply changes across all points. If a revision occurs, you want a system that applies the change across all relevant areas in the system--including the cost center, taxes, the manager, and benefits.
View retro adjustments by day. Many systems only allow you to view a summary of retro pay. In SyncHR, you can see adjustments by day. This detailed view helps pinpoint costs as well as aids in the accuracy of your record keeping.
Identify the impact of past, present, and future changes. While a future change is not retro, with a system like SyncHR that runs on an effective date and a timeline of events, you can easily view the impact of an adjustment based on when it goes into effect. This allows the finance, leadership, and HR teams to have an essential line of sight on budgets and necessary adjustments.
Remove retro pay administrative burdens
The business impact of automating retro pay can’t be emphasized enough. Automated retro payments eliminate the headaches (and mistakes) that come with the manual processing when new information comes up after you’ve already processed your payroll.
One of SyncHR’s growing mid-sized enterprise clients learned firsthand the benefits of automation. The company had struggled for years with processing accurate retro pay changes. Before SyncHR, their payroll team had to manually make changes, which often took up to three days to update and still sometimes resulted in additional errors that compounded the problem.
With SyncHR, the client automated previously manual processes and reduced payroll processing time from 3 days per period to under 4 hours per week — with virtually zero errors.
Today’s business environment makes it imperative that you have an accurate and flexible payroll system that works seamlessly with your HCM platform. Automating the retro pay process helps improve accuracy, reduces the burden on HR teams, and improves both compliance and cost controls.
Eliminate the burden and legal risk of payroll inaccuracies and manual processes by leveraging SyncHR’s next-generation HCM automation and real payroll innovation.
Contact a SyncHR solutions expert to learn more about how automated retro pays can help you create an efficient payroll process that provides the accurate, up-to-date data you need to manage your payroll expenses and your business decisions.
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Liz Sheffield is a writer and communicator based in Seattle, WA. She specializes in writing about topics related to HR and the people side of the business. Her areas of interest include HR Tech, HCM, leadership, training and development, employee engagement, culture, and recognition. Sheffield brings more than a decade of corporate experience in HR.