What Is a Prorated Salary, and When Should I Use It?

Legally, anyone can talk about their salary at any time without any repercussions. In reality, this is a little more tricky, as a lot of employers hope to silence workers from talking about salary. This can be for many reasons, with the primary one being that they don’t want workers to realize they are being paid different amounts or that something dodgy is going on.

As such, a culture of salary silence has pervaded throughout the workforce throughout the last few decades. This is not only an ethical cause for concern, but also a practical one, as many workers and managers don’t know basic terms about or alluding to salary, simply because they – justifiably – don’t feel comfortable talking or asking about it.

Without knowing about your salary, there are so many nuances of pay that you miss out on. Like a prorated salary. We can guarantee a lot of people don’t know what this is, due to the culture of fear surrounding talking about salary. So, what is a prorated salary? When should you use it?

These are the questions we seek to answer today.

Also read: 8 Steps To Create An Effective Employment Development Plan For Your Small Business And Its Benefits

What Is a Prorated Salary?

Prorated salary is the practice of adjusting salaries based on the amount of time a worker spends at their company during a pay period. Instead of basing wages on a set number of hours, the company bases wages on the time the worker spends at the company.

This can be a little different from what most people are used to and there are often quite valid reasons for this to happen, therefore, you need to be aware of the implications and how to go about negotiating it if you are going to go on to prorate salary.

The most common reason is that the employer will not have a full accounting of how much an employee has worked during a pay period or until that person leaves the company. This can be caused by many things, including several instances of unpaid leave or joining a company during the middle of a pay period. Getting prorate right is extremely important for employees and employers as it will affect their pay and their perception of the company.

Also read: Payroll Tax Vs Income Tax - The Ultimate Guide

When Should I Use a Prorated Salary?

There are many reasons to take or use a prorated paycheck. We will list the most common below, however do be aware that there are more reasons beyond this:

• When an employee takes unpaid leave: Most companies will offer paid leave, but for those that don’t, this is when prorated salary would come into play. If your employee is taking unpaid leave and prorating their salary is covered legally, then you may prorate their salary proportionally to the time they have taken off in that month.

• When a new employee starts with the company mid-pay cycle: Due to the nature of accounting, pay is done in cycles. This normally follows a monthly, weekly, or bi-weekly cycle that is paid in those time periods. If an employee starts working for you during the middle of one of these periods, then you will have to adjust their pay via prorate. This is because, you really don’t want to pay them for work they didn’t do and changing the accounting system of a company for one person is completely unfeasible.

• When you terminate an employee or they leave mid-pay cycle: Very much like the previous reason, but in reverse. You do not want to pay an employee beyond the time they have worked for you, so you need to use pro-rata to decide how much to pay them.

• For furloughed or reduced hours employees: Furlough is a temporary reduction in employee pay in exchange for them not working for you. Similarly, reduced hours are the working hours of the employee are reduced, as is their pay. When these are implemented, the company must use prorate to make sure they are not overpaying or underpaying their employees during that difficult period.

• Promotion and pay rises during the middle of a pay cycle: If an employee is promoted or given a pay rise during the middle of a pay cycle, then you will have to adjust their pay to show this.

As you can see, there are many reasons to use prorated salary, often it is due to undue change or problems with the company or the employee, however, there are instances where prorated salary is a good thing, like with promotions.

Also read: What Should I Do If My Employer Won’t Provide A Pay Stub?

How Do You Calculate Prorated Salary?

Now that we’ve discussed under what circumstance an employee is eligible for prorated salary, we can get into the nitty-gritty of how to calculate it.

The first thing to do is to start by calculating the employee’s salary in one-week increments. Most employees are paid in monthly, biweekly, or weekly salaries, which works when everything is running smoothly. However, for prorated salaries, weekly is the best way to calculate the salary properly.

Divide their yearly salary by 52 and this should give you the weekly amount they make. Once you’ve calculated the weekly salary, make sure you have the hourly salary calculated as well. You can do this by dividing their weekly salary into 5 (5 working days in the week) and then dividing that by the hours they work in a day.

Now, here’s the tricky part. Multiply the hourly rate that the employee makes by the amount of time they missed of work. This should give a number that accurately tells you the cost of their absence and this is the amount you deduct from their paycheck.

If you pay them weekly, then the amount is deducted from the weekly total. For bi-weekly, it is deducted from the bi-weekly total. For monthly, it is deducted from the monthly total.

Take that total from their normal paycheck, and that should give you the prorated salary they are entitled to. Here is an example below:

$20,000 / 52 = $384.62.

$384.62 / 40 = $9.62.

Hours missed = 8.

8 * $9.62 = $76.92.

Weekly: $384.62 - $76.92 = $307.70.

Bi-weekly: $384.62 * 2 = $769.24.

$769.24 - $76.92 = $692.32.

Monthly: $384.62 * 4 = $1538.48.

$1538.48 - $76.92 = $1461.56.

This is how you can calculate prorated salary. Just make sure if you are employing it, then you are sure that you need to, you are sure your employee is eligible, and you are sure you have done the calculation right.

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How Should I Talk to My Employer About Prorated Salary?

If you need to discuss prorated salary with your employer, then make sure you have all your cards and documents in place. First, know your worth. You need to know how much you are worth, but it doesn’t have to be a grounded calculation. You just need to know: your industry expertise and experience in years, your education level, and your specific licenses and certifications. Having these are worth their weight in gold and the more you have, the easier it is to negotiate.

Next, prepare questions and answers. If you are prepared, and they aren’t, you can easily confirm whether this is necessary and how much is just them trying to save money. Finally, be confident. The more confident you are, the more you can negotiate. If you are placid, the company will run rings around you, and you will just have to accept what is happening. If you are confident and bold, they will be wary about not only crossing you, but reducing your pay.

Also read: How Many Savings Accounts Should I Have? 

Conclusion

Prorated salary is a specific salary condition for specific circumstances. Knowing about it will not help you make sure you are being paid right, but also give you an understanding of how to negotiate for better salary in the future.

Your check stubs can be a great way for you to keep track of your finances so you can easily add the figures to your spreadsheet.