Summary: Employees who leave start or leave part-way through a pay cycle can be paid an appropriately 'pro-rated' or proportioned salary. Here we explain how to prorate salaries.
Payroll isn’t always easy, but at least it’s simplified when you have monthly or bi-monthly salary payments to process for your workers. You divide their salary by the number of pay periods in the year and take that starting amount to calculate their pay.
What do you do, however, if an employee works for only part of a pay period? How do you predict how much you’ll need to pay them if you don’t know how many days they’ll work? The answer is to provide them with a prorated salary.
We’re going to explain what this means and the various circumstances in which you may need to use this payment model.
What is a Prorated Salary?
A prorated salary is simply a salary that is not paid in full but instead is paid in proportion to the time the employee worked during a pay period. In other words, if a monthly employee doesn’t work for the whole month, you pay them for the percentage of the month’s working days that they do work.
Prorated salaries can be paid according to either the hours or the days that employees work. They are never more than the employees’ regular salaries but instead reflect pay for a reduced number of days or hours at the employee’s pay rate. A prorated salary is also called a pro rata salary since the Latin term pro rata means by rate, essentially a proportion.
Salaries are prorated to make things fair for the employee, who receives a salary proportional to the amount they work, and for employers, who don’t have to pay employees in full if they don’t work full pay periods.
Is It Legal to Prorate Salary?
In almost all jurisdictions in the world, it’s legal to prorate salaries. After all, prorated salaries are fair because employees get the pay they’re entitled to, and employers don’t have to pay full salaries to employees who don’t work their full pay periods. However, prorating salaries is only allowed in certain circumstances.
When Can You Pay a Prorated Salary?
We already know that prorated salaries are used to pay employees who don’t work for their whole pay periods. Now, let’s look at the various reasons that this could occur.
Starting mid-period
Not all employees start on the first of the month but it certainly would be convenient if they did. Instead, it may be necessary to get employees started at any time during a pay period, especially if you have long, monthly periods. To get their pay in line with the pay period, they can be paid a reduced first paycheck, prorated to compensate them only for the days or hours they worked.
Leaving mid-period
While they collect their pay at the end of the pay periods they work, this doesn’t mean that all employees will stay until this date. Instead, they may choose to leave mid-way through their pay period.
In which case, you can prorate their salary to compensate them only up until the day they leave. Likewise, if you need to suddenly terminate a worker, especially for reasons of gross misconduct, you’ll want them out immediately. You’ll also prorate their salary so you only pay them up until the day they are dismissed.
Giving a pay raise mid-period
Some employers set targets for their employees and reward them with raises. Because they can achieve their targets at any time during a pay period, their salaries may need to be prorated accordingly. The employee would receive a portion of their salary at their previous rate and then the other portion of their salary at their new regular rate.
Disciplinary action
Employers are often able to put employees on unpaid leave of absence for disciplinary reasons. If a worker is required to stay away from work mid-way through a pay period, they need to be paid a prorated salary up to compensate them until that day. When they return to work, they may also start mid-period and would again receive a prorated salary that compensates them from the day they return to work.
Unpaid leave
Various employers allow their workers to take unpaid leave as a benefit of their employment. The Family and Medical Leave Act (FMLA) also lets employees take up to 12 weeks of unpaid leave for specific family and medical reasons. Employees may request to take their leaves mid-period so just like for disciplinary actions, you’d need to prorate their final salary before leave and their first salary back from leave.
How to Calculate Prorate Salary
The calculation for a prorated salary is simple. All you need to know is the employee’s regular salary and the hours or days they worked during the pay period you’re calculating. This can be expressed in the hourly formula:
prorated salary = (hours worked / hours in the pay period) X regular salary
or the daily formula:
prorated salary = (days worked / days in the pay period) X regular salary
In both cases, you multiply their regular salary by the proportion (or percentage) of the pay period that they worked.
Prorated Salary Example
Omar is a monthly worker on a $5,000/month salary. He takes unpaid FMLA leave starting on the 16th of the month. There are 22 work days in the pay period but he has only worked 11 of them. His prorated salary would then be:
prorated salary = (days worked / days in the pay period) X regular salary
prorated salary = (11 / 22) X $5,000
prorated salary = $2,500
Prorated Salary vs Hourly Wages
We need to clarify that a worker receiving an hourly wage is not the same as an employee who receives a prorated salary. Hourly workers are contracted to work for an employer and may be provided with shifts or irregular schedules.
Even if they are full-time workers (defined by the Internal Revenue Service (IRS) as at least 30 hours per week or 130 hours per month) and receive benefits like health insurance and retirement plan contributions, they can still be paid by the hour.
Hourly workers are always paid by the simple formula of their worked hours in a pay period multiplied by their pay rate. If they work fewer hours, they earn less in wages, and more if they work more.
Salaried employees, on the other hand, receive a set wage for each pay period, whether monthly, semi-monthly, biweekly, or weekly. Their salary is determined for the year, and they are paid a part of it in each pay period:
- A monthly employee gets 1/12th of their annual salary each month because there are 12 pay periods in the year
- A semi-monthly employee gets 1/24th of their salary each half-month
- A bi-weekly employee gets 1/26th of their salary each half month (52 weeks/year ÷ 2)
- A weekly employee gets 1/52nd of their salary each week
If an employee doesn’t work for their entire pay period, however, their salary can be prorated to reflect this so they are only paid for the proportion of the period that they worked.
FLSA Exemption
According to the Fair Labor Standards Act (FLSA), workers should be protected by a minimum wage and must be paid for overtime hours worked. The current federal minimum wage in the US is $7.25/hour, though it can also be set higher in many states and cities.
The FLSA mandates a 40-hour work week, and any employee who works more than this is entitled to overtime pay at 1.5 times their normal wage. This applies to hourly workers, salaried workers, and both part-time and full-time workers…
…except for exempt employees.
Some types of white-collar (i.e. not manual) workers as exempt from the FLSA. These employees must be paid at least a minimum amount or a regular salary.
However, their hours are not strictly controlled, and they do not need to be paid overtime. The Department of Labor defines FLSA-exempt workers as certain executives, administrators, learned professionals, creative professionals, computer employees, and outside salespersons.
These employees must be paid a minimum of $684/week and must spend the majority of their time performing non-manual functions that relate directly to their job types. These workers can be hourly or salaried, and if they don’t work full pay periods, they can be paid pro rata salaries.
Prorated Salary Calculation for Fair Pay
If you have salaried workers who don’t work for their full pay periods, you can prorate their salaries to pay them what you owe. For various reasons, they may start or leave mid-way through a pay period, and it would be unfair to pay them any more, or any less, than the salary they earn for the time they work. Paying a pro rata salary lets employees start or end work without disrupting regular pay cycles and still collect the pay they’re entitled to.
FAQ
If it comes to your attention that a salary has been incorrectly prorated, you need to go back to confirm the employee’s regular salary amount and the hours or days they worked. Run your calculation again to confirm and if the employee was under- or overpaid, you’ll need to make a correction.
Yes. An employee’s deductions for income tax, Social Security, and Medicare are all based on a percentage of their earnings. If they earn less because they’re paid a pro-rated salary, they also need to pay smaller deductions.