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Summary: A prorated salary is a partial payment based on the actual time worked. This guide explains when it's used and how to calculate it accurately.
What Is a Prorated Salary?
The word “prorated” comes from an old Latin term, pro rata, which means by rate or by proportion. Therefore, a pro rata or prorated salary is only partially paid, based on how much an employee has worked. Prorated salaries are paid when employees don’t work for the full period that they should to receive their full salary. This can happen for various reasons, and, in most countries, the payment of prorated salaries is strictly controlled by employment laws.
Prorating a salary is meant to ensure that an employee gets paid for the work they do, while letting their employer pay them less than a full salary when they don’t work for a full pay period. A prorated salary is always less than a full salary and is paid as a percentage of what a worker is normally paid.
When an employee works only a part of a month, half, for example, their salary might be prorated so they are only paid half of their salary. Likewise, if they work fewer hours or days than they are contracted for, their prorated salary will reflect this reduced proportion.
Why Pay a Prorated Salary?
Simply put, when an employee works for only part of a pay period and isn’t entitled to be paid for their missed days, you may need to prorate their pay. Employees who are away on annual leave, sick days, parental leave, or other paid leaves should receive their full salaries, but those who are not working for other reasons may not. It’s crucial to know the circumstances in which you can pay workers less than their full salaries so that you can use pro rata pay correctly.
Prorating employees’ salaries is generally legal in most places, but strict rules outline the circumstances in which this can be done. Some of the main reasons for using prorated salaries include:
Employees starting mid-way through a pay period
If an employer pays their staff at the end of every month, but a new worker starts working part-way through a given month, the employer has two choices.
One would be to set up an individual pay schedule for that employee so that their payday is set one month after the date they started working. While this doesn’t sound complicated for one employee, staggering pay schedules for an entire team of employees can quickly become a logistical nightmare.
The other option, and the one chosen by most employers with even a moderate number of employees, is to pay the new employee only a portion of their salary for the partial month they worked. For the next month, they’d get paid a full month’s salary on the same payday as everyone else.
This helps align all employees to the same pay schedule and greatly simplifies the payroll process.
Employees stopping work mid-way through a pay period
If an employee resigns, is dismissed, or even transfers to a different part of an organization that handles payroll independently, their salary may also need to be prorated. They would be paid for the days they worked until the change in their employment status, based on a percentage of all the days in the full pay period.
Employees taking unpaid leave
Employees may request leave outside of their normal paid entitlements (sick leave, annual leave, etc.).
In some countries, they may also be entitled to unpaid leaves, like parental leave or sabbaticals from academic positions.
In any case, if they take leave mid-way through a pay period, they should be paid for only the days that they worked.
Employees receiving disciplinary action
Some jurisdictions or professions allow employers to put workers on leave without pay for disciplinary reasons.
In these cases, they won’t pay the workers’ full salaries, but instead need to reduce them according to the number of days or weeks that they’re required to be absent from work.
Employees working reduced hours
In some jurisdictions, employees can be entitled to a reduced working schedule with reduced pay for various reasons that can include mental or physical health concerns or even the employer’s economic reasons.
Rather than taking leave and missing out on their salaries, employees can still earn income by working a reduced schedule. If they work for six hours a day instead of eight, for example, their pay could be reduced by 25%.
Employees receiving salary changes
Prorating salaries is also used when employees receive pay increases or, as is possible in some countries, decreases.
An employee may be awarded a pay raise mid-way through a pay period, and this would mean that they’d need to be paid at their old rate for the first part of the period and at their new rate for the latter part. The employee would therefore receive two prorated salaries. Both would be less than a full period’s pay, but together, they would add up to a greater amount than their previous salary.
How do you calculate prorated salary?
The basic calculation for a prorated salary is straightforward. If you’re going to pay an employee only a part of their salary, you need to know two things: what their full pay would be and what portion of a full schedule they worked.
Here’s how to calculate a prorated salary:
- Determine the employee’s full salary for the pay period in question.
If you don’t already know their regular salary, you can figure it out by taking their full annual salary and dividing it by the number of pay periods in a year.
For example, an employee paid monthly is paid 1/12th of their salary each month. An employee paid bi-weekly would be paid 1/26th of their salary every two weeks. - Calculate the amount of time they worked as a percentage of the full time for the pay period.
If they normally work 22 days per month but only worked 11 days, for example, they worked 11 / 22 = 0.5, or 50% of the full pay period.
If their working time is based on hours instead, you can similarly calculate the proportion of hours they worked to the total working hours in the pay period.
If they should work 80 hours in two weeks but only worked 40, their proportion would also be 40 / 80 = 0.5, or 50% of their total hours. - Finally, calculate for the prorated salary.
Calculate their prorated salary by multiplying the proportion of the pay period they worked by their regular salary, following this formula:
Prorated Salary = salary for pay period x (time worked / full time in pay period)
For a sample calculation, imagine Employee A is hired mid-way through a month, and their employer, XYZ Inc., pays its employees monthly.
Employee A’s first salary payment would need to be prorated because they didn’t work all of their first month. If they have an annual salary of $60,000 and worked only 7 out of 22 days in the month, their salary would be calculated as follows:
| Step | Calculation | Result |
|---|---|---|
| Annual Salary | $60,000 | |
| Monthly Salary | $60,000 ÷ 12 | $5,000 |
| Time Worked Ratio | 7 days ÷ 22 days | 0.318 |
| Prorated Salary | $5,000 × 0.318 | $1,590 |
For their first month, Employee A’s gross salary would be just $1,590. In subsequent months, this amount would be $5,000.
How Does a Prorated Salary Affect Employee Deductions?
Since a prorated salary means that an employee will receive less than a full salary, this also affects the amount of taxes you must withhold from their pay.
However, you don’t need to perform another pro rata calculation on their tax obligations. Instead, you can simply calculate a percentage of their already prorated salary.
The same is true for other deductions like those for social security and other schemes. Employees will pay less in taxes and deductions on a prorated salary than they will on a full pay period’s salary.
Legal Restrictions for Prorated Salaries
Prorating salaries is a fair way to pay employees for working partial pay periods and is legal in most jurisdictions. However, these salaries still need to respect laws on minimum wages and overtime.
Many countries set a minimum monthly salary that workers must receive, and this may restrict the use of salary prorating.
Overtime hours are normally calculated weekly, so even if a monthly-paid employee doesn’t work for a full month, they should still receive overtime pay for excess hours during the weeks they worked.
Prorated Salary Means Fair Pay
In summary, a prorated salary is paid proportionally to the amount of time an employee works during a pay period. This helps employers align all their employees to the same pay schedule and pay them only for the working time they provide. Employees still receive the pay they deserve for the work they do, making it fair for all parties.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
