Easy Guide On How And Why To Prorate Salary (With Examples)

By Elsie Boskamp - Apr. 27, 2021
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Whether you’re an employer hiring a new worker or a job-seeker starting a new position, understanding the complexities of a prorated salary is essential to avoiding hiccups during the hiring and onboarding process and throughout the duration of an employee’s career.

Typically, employers across every professional industry will eventually be tasked with prorating an employee’s salary for a variety of eligible reasons including unpaid time off, disciplinary actions, company furloughs, employee terminations, and new employee onboarding.

Closely following fair labor standards and meticulously calculating a worker’s hourly wage and ensuring correct wage and hour division is the first step in properly prorating an employee’s salary.

For most people, wage rates are extremely important, as we rely on regular paychecks to pay rent and other living fees. Paying workers the correct hourly rate for a specified salary level will ensure employee satisfaction and avoid payment issues, like unpaid overtime, monthly salary discrepancies, unaccounted comp-time, or deductions for sick leave or vacation time.

By using the tips outlined in this article, you’ll be able to easily determine which employees are entitled to a prorated salary, why you should prorate a paycheck as an employer, and how to go about paying salaried employees a prorated hourly rate.

What Is a Prorated Salary?

A prorated salary is an adjusted paycheck proportional to the number of hours worked during a specified pay period.

Prorated salaries are often necessary if a salaried employee is hired after the first of the year or when a salaried employee doesn’t work the full amount of hours agreed upon in their employment contract.

Prorated salaries are solely used for salaried workers. Unlike salaried employees, hourly workers, who are typically classified as non-exempt employees, are eligible for overtime and therefore do not qualify for prorated salaries.

That’s because hourly workers don’t receive predetermined wages and are only paid for hours worked during a monthly, weekly, or biweekly pay period.

In simple terms, a prorated salary is a calculation of a salaried employee’s hourly rate of pay and is used to pay full-time workers when they don’t work the number of hours expected of them.

Reasons to Prorate a Paycheck

Prorated salaries allow employers to reduce a salaried worker’s paycheck based on their work performance and hours during a pay period, thus not paying them for days or hours they did not work. In this sense, correctly prorating an employee’s salary can save money and avoid unnecessary expenses.

Salaried employees are protected under the fair labor standards act and generally cannot have their pay lowered. However, there are many valid and lawful reasons for prorating a salaried employee’s paycheck.

Since salaried workers enter an employment contract when accepting their position, they are obligated to work a certain amount of hours each pay period. When they fall short of their required workweek hours, in some cases, employers are entitled to prorating their salary, no matter if the worker just got a pay raise, is a seasoned employee, or a brand new hire.

Here are some of the most common reasons for prorating a paycheck:

  1. An employee takes a day off. If you do not offer paid time off and an employee takes a personal or vacation day, as an employer you are able to pay them a prorated salary based on their regular hourly rate as determined by their annual salary.

    If an employee takes a day off and you do offer paid time off, labor laws restrict you from prorating their salary. However, if an employee takes more than their allotted paid vacation time, and chooses to take unpaid vacation days, then you are able to prorate their paycheck.

    Similarly, if a salaried employee takes a day off during their probationary period before their paid time off benefits kick in, a prorated salary is appropriate.

  2. An employee starts in the middle of a pay cycle. If a new employee starts working in the middle of a pay period, the employer is under no obligation to pay them for the entire pay cycle. A prorated salary is permitted in such instances.

  3. An employee quits or is terminated in the middle of a pay cycle. Just as prorated salaries are acceptable when new employees start working in the middle of a pay period, they are also used when an employee stops working before a pay cycle ends.

    Whether an employee quits or is terminated, a prorated salary can be used when issuing their final paycheck by determining their hourly rate and compensating them only for the hours of work they completed during the specified period.

  4. Company-wide furloughs or reduced working hours. When a business announces a company-wide reduction of working hours or institutes a furlough, or a temporary period where employees are mandated to take time off work, usually without pay, employers are able to prorate the paychecks of their salaried workers.

    Offering a prorated salary or furlough pay during such instances can help business owners cut costs and save money during difficult times.

  5. An employee receives an unpaid disciplinary action. If a salaried employee is hit with disciplinary action by a company’s human resources department for violating a safety guideline, failing to complete their required duties, or breaking a company policy or code of conduct regulation, their employer may be permitted to prorate their pay.

    Under U.S. labor laws, pay reductions are allowable if full-time salaried employees are out of the office for at least one full day due to a pending punishment or unpaid disciplinary action.

Although prorating an employee’s salary is a widely accepted payroll standard used, when applicable, by employers in nearly every professional industry, in some instances, employers are unable to offer a prorated salary as labor laws prohibit it.

In instances where an employee is called away from work to perform civic duties, like serving on a jury, testifying in court, or fulfilling military obligations, their salary cannot be reduced or prorated.

How to Prorate an Employee’s Salary

After determining whether or not a salaried employee is eligible for a prorated salary, the next step is determining what, exactly, their prorated salary would be. Calculating a prorated salary is usually pretty simple, however, there are a few steps you need to take to get it right.

The easiest way to calculate a prorated salary is by determining an employee’s hourly rate according to their annual rate of pay. The best way of doing this is by dividing the employee’s yearly salary by 52 weeks, then dividing their weekly rate by the number of hours they typically work in a regular workweek.

Once you’ve determined an employee’s hourly wage, calculating their prorated salary is quite easy.

To figure out what to pay an employee proportionate to the amount of work they’ve done in a pay period, you’ll need to multiply their hourly rate by the number of hours they’ve missed during the specified period. Once you’ve calculated this number, you’ll need to subtract it from their regular weekly wage to figure out their prorated salary.

To simplify this process, you can use the formulas in this four-step process to quickly and accurately determine an employee’s prorated salary:

  1. Yearly salary / 52 = weekly salary

  2. Weekly salary/number of hours typically worked in a week = hourly rate

  3. Hourly rate X number of hours missed in a traditional workweek = salary deduction

  4. Weekly salary – salary deduction = prorated salary

For example:

If a full-time hourly employee earns $60,000 yearly, working 40 hours a week, they would earn a weekly wage of $1,153.85 and an hourly wage of $28.85. If this employee takes 10 hours of unpaid leave during a weekly pay period they would receive a prorated salary of $865.35, a $288.50 deduction from their typical paycheck.

After determining an employee’s prorated salary, it’s important to also adjust your payroll documentation. When an employee receives a reduced paycheck, their tax liability decreases since their gross wage is less than their typical weekly pay.

Based on an employee’s updated wage and prorated salary, you’ll likely need to withhold less Social Security and Medicare taxes, and adjust the local, state, and federal income tax withholdings.

Final Thoughts

If you find yourself in a position where you need to prorate an employee’s salary, carefully calculating their hourly rate, closely following state laws and fair labor standards, and taking their salary status into account will ensure that you pay them the correct rate.

Understanding who qualifies or is eligible for a prorated salary, where pay is proportionate to the number of hours worked by a full-time salaried employee, is key to correctly calculating pay deductions and issuing fair paychecks.

By following the guidelines outlined in this article you’ll be well equipped to properly prorate employee salaries in instances where salary deductions are allowable, enabling you to cut business operating costs and save money.

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Elsie Boskamp

Elsie is an experienced writer, reporter, and content creator. As a leader in her field, Elsie is best known for her work as a Reporter for The Southampton Press, but she can also be credited with contributions to Long Island Pulse Magazine and Hamptons Online. She holds a Bachelor of Arts degree in journalism from Stony Brook University and currently resides in Franklin, Tennessee.

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