If you’re dealing with a pay error, don’t worry. There is a process to fix the difference — and it’s called retro pay.
Employers use retro pay to correct past pay periods. Retro pay ensures that employees receive the full amount they were owed for work already completed.
It’s a common payroll concept in Canada. And that’s why we’ve broken down what retro pay is, when it applies, and how it’s calculated.
Let’s get started.
Table of Contents
What is retro pay in Canada?
Retro pay, also called retroactive pay or a pay adjustment, is extra compensation paid to an employee to correct a previous payroll period. It covers the difference between what an employee was actually paid and what they earned according to the correct wage, salary, or rate.
This adjustment happens when a pay increase, bonus, or other change wasn't included in a previous paycheque. The retroactive payment is calculated and added to a future pay period so the employee receives the correct total earnings. Retro pay applies to both hourly and salaried employees.
When do employers issue retro pay?
Retro pay is issued when an employee was paid incorrectly for past work. Here are the most common situations:
- Delayed salary increases: A pay raise is agreed on but isn't applied right away
- Promotion adjustments: An employee is promoted with higher pay, but the new rate isn't included in the first pay periods after the change
- Payroll errors: Mistakes in payroll calculations, such as entering the wrong pay rate or missing recorded work hours
- Overtime miscalculations: If overtime hours are missed or calculated at the wrong rate
- Shift premium corrections: Employees who work nights, weekends, or other premium shifts may not receive the correct shift differential
Retro pay vs. back pay: What's the difference?
Retro pay and back pay both deal with correcting pay issues, but they address different situations in payroll.
| Aspect | Retro Pay | Back Pay |
| What it corrects | Underpayment for work already compensated | Unpaid work or wages not previously paid |
| Typical cause | Pay rate changes, promotion adjustments, payroll errors | Missed pay periods, unpaid overtime, withheld wages |
| Payment status | Employee was paid, but not at the correct rate | Employee wasn't paid for work done |
| Legal context | Issued to fix errors in pay rate or calculation | Often results from legal claims or employment standards complaints |
Retro pay addresses situations where an employee received a paycheque, but the amount was incorrect based on changes that were supposed to be applied. Back pay applies to cases where an employee didn't receive any pay for work they completed.
How to calculate retro pay step by step
Retro pay is calculated by comparing the amount paid with the amount that was supposed to be paid, then paying the difference. This process involves several steps to ensure the calculation is accurate.
Here are the steps you can take to calculate retro pay:
1. Confirm the correct pay rate and effective date
The correct pay rate is the new or updated wage or salary that was agreed upon. The effective date is when the new pay rate was supposed to begin. Promotion letters, employment contracts, or salary increase notices confirm these details.
2. Identify affected pay periods and hours
Affected pay periods are the pay cycles between the effective date of the pay change and the date the new rate was actually applied. For hourly employees, calculate the total number of hours worked during these periods. For salaried employees, count the number of pay periods impacted.
3. Calculate the rate difference
Subtract the old pay rate from the correct pay rate to find the rate difference. Multiply this difference by the total affected hours (for hourly employees) or by the number of affected salary periods (for salaried employees). The formula is: (correct rate – paid rate) × hours or periods.
4. Apply CPP, EI and income tax deductions
Retro pay is included in employment income and is subject to Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax. The Canada Revenue Agency has requirements for special payments, including retroactive pay increases and lump sums.
Example retro pay calculations
Retro pay calculations depend on the type of employee and the reason for the pay adjustment. Here are sample scenarios that show how to calculate retroactive payments.
Hourly wage increase scenario
An employee was paid $20 per hour, but the hourly rate increased to $22 per hour 8 weeks ago. The raise wasn't reflected in pay until now. The employee worked 40 hours each week for 8 weeks.
Calculation:
- Total hours: 8 weeks × 40 hours = 320 hours
- Rate difference: $22 – $20 = $2 per hour
- Retro pay: $2 × 320 hours = $640 (before deductions)
Salaried pay adjustment scenario
A manager's annual salary increased from $60,000 to $65,000, but the new salary was applied 3 months late. The manager is paid monthly.
Calculation:
- New monthly salary: $65,000 ÷ 12 = $5,416.67
- Old monthly salary: $60,000 ÷ 12 = $5,000
- Monthly difference: $5,416.67 – $5,000 = $416.67
- Retro pay: $416.67 × 3 months = $1,250.01 (before deductions)
CRA deductions on retroactive payments
In Canada, retro pay is taxed as a special payment under Canada Revenue Agency guidelines. This means the extra pay given to correct earlier payroll mistakes is treated like regular employment income.
Employment standards for retro pay vary across Canada. Provincial laws and deadlines determine how and when employers address payroll corrections.
CPP contributions
Retro pay is included when calculating Canada Pension Plan contributions. If an employee hasn't reached the CPP contribution limit for the year, CPP will be deducted from the retro pay amount. If the employee has already reached the annual maximum, no further CPP is deducted.
EI premiums
Employment Insurance premiums are also deducted from retro pay, as with regular pay. The standard EI rates for the year are applied. If the total EI contributions for the year have already reached the maximum allowed, no additional EI premiums are taken from the retro pay.
Special tax calculation for previous years
If retro pay is for work done in previous calendar years and is paid in the current year, CRA allows a special tax calculation. This rule helps calculate tax on the retro pay based on the year it was actually earned, rather than taxing the entire lump sum in the current year.
Communicating retro pay to employees
Clear communication about retro pay helps employees understand their pay adjustments and reduces confusion.
Pay stub documentation
A pay stub that includes retro pay uses clear labels and details. It specifies the effective dates for the pay change and separates the gross (before deductions) and net (after deductions) amounts. This way, employees can see exactly what was corrected and over which time frame.
Written notification elements
Written notification about retro pay often includes:
- Reason for adjustment: Brief explanation of why the correction was made
- Calculation details: Dates, pay rates, and hours or salary periods involved
- Tax implications: Explanation that taxes and other payroll deductions apply
- Contact information: Details for employees who have questions
Keep payroll compliant and employee trust intact
Pay mistakes happen. But it’s crucial to stay on top of them.
That’s because accurate and timely retro pay is required for legal compliance in Canada. Employment standards and payroll laws require employers to correct pay errors promptly and document any adjustments.
Consistent retro pay practices also help maintain employee trust. And when you communicate about pay corrections transparently, it shows respect for your employees and supports a positive workplace environment.
Want to make sure you’re payroll compliant and maintain employee trust? That’s where payroll software comes in.
Rise is one software that can help support compliance by tracking pay changes, recording corrections, and generating accurate reports.
We’re here to help — book a demo with our Rise team today so you can experience worry-free payroll.
FAQs about retro pay in Canada
How long after discovering a payroll error can employees claim retro pay in Canada?
The statute of limitations for an employee to claim unpaid wages can vary significantly by province, from as short as six months to as long as six years. It's crucial for a business to know and comply with the rules of its specific jurisdiction.
In most provinces, employees can claim unpaid wages caused by a payroll error for 6 months to 2 years from the date the error occurred, depending on provincial employment standards legislation.
Does retro pay increase an employee's vacation pay entitlement?
Yes, retro pay increases an employee's total earnings, and since vacation pay is calculated as a percentage of total wages earned, additional retro pay can result in higher vacation pay accrual.
Can retro pay result in additional overtime payments being owed?
Retro pay can trigger a recalculation of overtime premiums if the corrected pay pushes an employee's weekly hours above the overtime threshold during the affected pay periods, resulting in additional overtime pay on top of the base retro amount.
