Retro Pay 101: Payroll Lessons From the Government Shutdown

shutdown

The absolute worst feeling that a payroll professional can have is finding out someone didn’t get paid.

While that stings for us, it’s even worse for the ones who wake up to an empty bank account on payday. Last week, roughly 800,000 federal employees experienced that due to a partial government shutdown.

Eventually, most of these employees will be paid for their time. And given that the shutdown started back in December, it's a sure bet that payroll professionals like me will be asked to process plenty of retroactive payments. Here’s how those should be handled.

Essential vs. Non-Essential

Let's start with the basics. Federal workers are on a biweekly pay frequency. This means that they get their paychecks every other Friday, or 26 times per year. Because the recent shutdown started in late December, January 11 marked the first missed payday for federal workers.

But wait—if the government is shut down, why are people still working?

Keep in mind that there are two types of workers impacted by the partial government shutdown. Some employees are considered “non-essential.” These individuals receive furloughs during a shutdown. This means they do not report to work and do not receive a paycheck. Furloughed workers can file for unemployment benefits if they need to.

Conversely, “essential” workers are still on the job without pay. These individuals cannot apply for unemployment benefits because they technically remain employed. There's a good chance that both these workers and their furloughed colleagues will be provided back pay after the shutdown ends. At the end of every previous shutdown, Congress has passed measures to ensuring employee back pay.

And federal contractors? Sorry—unlike essential and non-essential workers, they almost certainly won’t receive back pay for the time lost during the shutdown.

Processing Retro Pay

So how does retroactive (or retro) pay work in payroll? Simply put, retro pay is compensation owed to an employee for work performed in a previous pay period.

In the case of these government employees, it would be a simple calculation of the time worked multiplied by hourly rate. Here’s a quick example: If an employee worked 160 hours during the shutdown (or roughly two biweekly periods) and they are typically paid $10 per hour, they would receive a check for $1,600 ($10 x 160). Of course, taxes will come out of that amount as usual. There are no special tax breaks on retro pay.

That example is a little cut and dry, so let’s look at a more common reason for retro pay. In this scenario, let’s pretend that the government up and running. Our same government employee from before worked 86 hours one pay period and was paid $860 (86 hours x $10.00). But that employee (who is nonexempt) is due overtime for six hours. Remember, any work over 40 hours per week is overtime. At time and a half ($10 x 1.5), the employee should receive a rate of $15 per hour for overtime. The overtime total here is $90 ($15.00 x 6). If we take the original payment of $860 and subtract it from the properly calculated $890, we get a remainder of $30. That $30 would be paid to the employee as retroactive pay.

 



It’s critical to understand that these payments are not considered additional wages. Retroactive pay simply represents a true-up of wages already earned. That’s an important distinction to make when making these kinds of payments to employees.

It’s never a good feeling to see employees going unpaid or underpaid. In the case of the partial government shutdown, it’s all too real. One thing is for sure—when this most recent government shutdown ends, it’s certain there will be a lot of retro pay being calculated by payroll professionals just like me. 

Topics: Payroll, Taxes, overtime

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