What is Prorated Salary and How to Calculate it [Full Guide]
August 26, 2023
A prorated salary is a type of adjustment done to an employee’s salary based on the number of work days or hours they have completed in a pay period.
There are various instances where prorated compensation is needed, and it is essential to know how to calculate it to ensure fair compensation for all employees.
This article will discuss what prorated pay means, how it works, and who is eligible to receive a pro-rata salary.
- A prorated salary is a percentage of an employee’s regular pay, determined by the number of hours or days worked in a pay cycle.
- Freelancers and employees paid hourly are not suitable for prorated pay.
- Employees who are paid a fixed rate and those who were hired or have taken a leave of absence in the middle of a pay period are entitled to pro-rata salary.
What is a Prorated Salary?
A prorated or pro-rata salary is the percentage of an employee’s full-time salary. The prorated amount is based on the work days completed in a given pay period.
To help you better understand the meaning of prorated salary, let’s say an employee is hired in the middle of a pay cycle, and their salary is prorated based on their start date.
Since they were not hired at the beginning of a new pay period, only the hours they rendered since the day of their employment count when calculating their earnings for the pay cycle.
If an employee only works four days in a six-day work week, they are only entitled to receive compensation worth four-sixths of their regular pay.
Calculating a pro-rata salary is also applicable when an employee resigns midway through completing a pay cycle. The employee’s last pay will be based on the hours they have rendered before their final work day in the office.
Who is Eligible For a Prorated Salary?
Not all employees or workers are entitled to a prorated salary. Employees paid hourly as opposed to a fixed salary rate are not eligible for pro-rata pay. Freelancers are also not a good fit for prorated compensation.
On the other hand, employees who undergo the following changes within an ongoing pay period or pay cycle are eligible for a prorated salary:
- Employees receive a fixed salary, which is often reported as a yearly rate
- A newly hired employee whose start date falls in the middle of an ongoing pay period
- A worker who resigns or is terminated
- An employee who gets a promotion
- Employees who take multiple unpaid days off to participate in specific civil duties that they cannot miss, such as a military leave or jury duty
- An employee has to take unpaid sick leave
- Unexpected leave due to an emergency, medical appointment, an accident, or the death of a loved one
- An employee is asked to take a mandatory unpaid leave of absence or furlough, possibly as a result of a suspension or a temporary pause in the worker’s employment
How to Calculate Prorated Salary
While there may be prorated salary calculators available online, it is still essential to know and understand how to calculate a prorated salary.
The key is to know the exact number of prorated hours by getting the total number of hours completed by an employee within a pay cycle. This step is crucial for part-time employees to ensure their compensation is proportionate to their completed hours.
The simplest equation used to calculate a prorated salary is as follows:
(Annual salary / Employee’s full-time work hours in a year) X the number of hours completed in a pay period)
This equation works if you are calculating the pro-rata pay of a newly hired employee.
Let’s try the equation with the following example:
A newly hired office worker is offered an annual salary of $60,017. As part of his employment contract, he must work eight hours a day from Monday to Friday. He is also paid semi-monthly, every 15th and the 30th or 31st of the month.
If he started work on August 23, that means he only worked seven days (56 hours) until the next payday, which will be on August 31st.
Using the values in the example:
- Annual salary: $60,017
- Full-time work hours in a year: 2,080
- Hours completed in the latest pay period: 56 hours
($60,017 / 2,080 hours) X 56 hours = $1,615.6
There are more elaborate ways to calculate an employee’s prorated salary, depending on the payroll cycle followed by the company and the circumstances that led to the employee's prorated pay.
Check out the steps for calculating a prorated monthly salary and a prorated salary increase below:
Step #1. Determine the regular wages or pay an employee receives for every pay period.
Note that this will depend on whether an employee is paid weekly, bi-weekly, semi-monthly, or monthly:
- Weekly: Divide employee’s salary by 52 (52 pay cycles)
- Bi-weekly: Divide employee’s salary by 26 (26 pay cycles)
- Semi-monthly: Divide employee’s salary by 24 (24 pay cycles)
- Monthly: Divide employee’s salary by 12 (12 pay cycles)
Step #2. Take note of the number of workdays in a pay period. Then, get the number of work days employees complete within a pay period or cycle.
Step #3. Divide the number of days worked by the number of work days in a regular pay cycle. Multiply the resulting value by 100 to convert it into a percentage.
Step #4. Use the resulting percentage to calculate the amount paid for the employee’s prorated salary.
Prorated Salary Example - Monthly
Here is an example demonstrating how to get the exact amount for a prorated monthly salary:
Emma is regularly paid $6,228 a month. Her employer follows a monthly pay cycle, meaning she receives compensation for her hard work 12 times a year. Her work schedule entails a five-day work week, Mondays through Fridays.
For the month of June, she had to take a week’s worth of unpaid emergency leave because her father fell ill and required immediate medical attention. Since Emma works from Monday to Friday, she would have worked 22 days had she not taken a leave of absence.
Her unpaid leave left her with only 17 work days completed.
Based on the example above, we have the following values needed to calculate Emma’s prorated monthly pay:
- 17 days worked / 22 work days for the month of June = 0.77
- 0.77 X 100 = 77%
Emma is only entitled to receive $4,795.56, or 77% of her regular salary.
Prorated Salary Example - Pay Increase
Emma got promoted to a managerial position in July due to her exceptional work performance. Her promotion came with an additional $650 on top of her regular salary. The said increase was made effective on July 17th.
Here’s how to calculate her prorated salary increase:
- Determine Emma’s salary before her promotion. Emma’s salary increase took effect on July 17, which means she completed ten working days with her pre-promotional rates reflected on her paycheck. Note that July has four weeks or 20 regular work days.
10 work days / 20 work days = 0.5
0.5 X 100 = 50%
50% of $6228 = $3,114
- Calculate Emma’s prorated increase. This includes the number of work days covered since her salary increase took effect.
10 work days / 20 work days = 0.5
0.5 X 100 = 50%
50% of $6878 = $3,439
- Combine the prorated values before and after her salary increase to get her prorated salary increase.
$3,114 + $3,439 = $6,553
How Prorated Salary Impacts Employee Benefits
Prorated salaries have a notable impact on different employee benefits, such as health insurance, bonuses, and incentives.
These effects or changes include:
Paid time off (PTO)
Paid time off need not be prorated when used by an employee in the middle of a pay cycle. The only time an employee’s salary is calculated based on their prorated hourly pay for taking time off from work is if their employer does not offer PTO.
Without a PTO, the employee’s unpaid days off are adjusted to meet the regular work days they have completed.
Health Benefits or Insurance
Contributions to employees' health insurance will be significantly reduced if their salaries are prorated. Depending on the number of days or hours included in calculating the pro-rata pay, employees may expect fewer contributions to their health insurance.
Incentives and Bonuses
Pro-rata salary also reduces the bonuses and incentives that employees may be entitled to receive. However, it will also be based on the company’s guidelines and the type of bonus awarded to the employee.
For instance, if the incentive is a gift card, the prorated pay will not affect the amount or value. Some countries outside of the U.S. pay regular employees 13th-month bonuses every year.
Now, if an employee receives a prorated salary for a specific pay cycle, it will also affect the 13th-month bonus they are to receive. Typically, 13th-month bonuses are 1/12th of the employee’s annual salary.
Employees hired in the middle of the year will receive a lower amount of 13th-month pay than employees who have completed all 12 work months for the year.
The higher the percentage of an employee’s prorated pay, the lower the remaining portion of their salary that goes to their retirement contributions.
As such, if an employee accrues more prorated pay overtime, they may not receive as much retirement savings as they hope by the time their contributions have matured.
Legal Restrictions on Prorated Salary
When assessing whether implementing a prorated salary is good, it is vital to know that the legal constraints on pro-rata pay vary per country or state. Here are some standard legal restrictions when calculating a prorated salary:
Employees entitled to overtime compensation should receive a prorated amount that considers all extra hours they provided in a given work period or day.
Employers must see that, when calculating an employee’s prorated pay, the resulting amount should not be lower than the approved minimum wage in a state or country.
Prorated salary should not discriminate against race, gender, or other individual characteristics of an employee. An established system for calculating prorated compensation should stay in place regardless of the employee’s background and social or financial status.
How to Ask Your Employer For a Prorated Salary
Some employees might need to negotiate their prorated salary with their employer. When the need arises, discussing potential benefits and negotiating pay rates (especially for newly hired workers) is ideal.
Ask employers about the benefits they offer and the possible compensation packages that employees are entitled to receive throughout their tenure in the company. Doing so will help specify how one can approximate one's earnings and salary adjustments when prorated.
Calculating a prorated salary is inevitable in every company, particularly when an employee joins the team, resigns, or takes a leave of absence amid an ongoing pay period.
Employers must practice transparency when making adjustments to their employee’s pro-rata salaries.
This includes specifying all the company's benefits, incentives, and voluntary contributions so employees have a clearer idea of how prorated pay affects their overall compensation.