- When changes occur in a salaried employee's availability, you will likely want to negotiate a prorated salary.
- Since this only pertains to salaried workers, you do not need to worry about prorating an hourly employee's pay.
- In some instances, prorating an employee's salary can be beneficial to both parties.
- This article is for small business owners who want to understand what a prorated salary is, what it means to an employee and how to fairly calculate a prorated salary.
Since they make the same amount each pay period, paying salaried employees generally doesn't require much calculation. However, if the amount of time they spend working each week temporarily changes, the payment agreement you previously had might be out of whack. One action you can take to level things out in an equitable way for both sides is to calculate a prorated salary, which will reflect the reduction in that worker's productivity. By learning what a prorated salary is and how to calculate one when you need to, you can ensure both you and your salaried employees are on a level playing field.
What is a prorated salary?
Hiring a salaried worker means you've entered into an agreement with that employee to pay them a set amount of money every year, barring any additional overtime that may happen from time to time if they're eligible. That agreement hinges on the idea that the employee works a set number of hours each week – usually 40 hours – to meet that salary's requirements. When an employee fails to work those hours, their pay must be adjusted accordingly, and that's when a prorated salary comes into play.
Since hourly employees' schedules can change week to week, there's no need to prorate their pay; the fluctuation in output is expected. Prorated salaries are only necessary if the number of hours worked by someone with a predetermined yearly wage doesn't meet expectations.
Jim Pendergast, senior vice president of altLINE by The Southern Bank, said a daily prorate is the typical formula.
"For example, a salaried employee can divide their annual salary by the number of hours worked in a year to get their hourly rate," Pendergast told Business News Daily. "So, if an employee decides to reduce their working hours by one hour every day, their prorated salary will have one hour's worth of wages deducted for every workday."
A prorated salary doesn't have to just reflect lost hours. In some instances, it will be reasonable to reflect entire days that are lost. This changes the calculation slightly, but the end result – a daily prorate – acts relatively the same way.
Though this may seem like a lot of extra effort just to reduce someone's pay, Jacqueline Tully, an employer-side labor and employment attorney and founding partner at Clarian Counsel, argued that the process benefits both parties.
"Prorating salary instead of paying the worker hourly ensures labor-expense stability for the employer and income stability for the employee," she said. "It also sets the expectations of how many hours per week the employee will generally work."
Did you know? If your salaried employee works less time than expected, you can offer a prorated salary to compensate them fairly while ensuring you don't pay for working hours that weren't completed.
How do you calculate a prorated salary?
When you decide that you need to prorate an employee's salary, you need to take certain steps to do it as fairly as possible. Since this ultimately results in a reduction in pay most of the time, adhere to the following steps to ensure your employee's prorated salary is accurate.
1. Determine a salaried worker's hourly rate.
When you offered an employee a salaried position, you told them the gross amount they would be paid for that year. With that in mind, it's fairly simple to find how much that salary translates to an hourly rate. [Does your business need online payroll software to help with these calculations? Check out our recommendations for the best payroll software.]
In our example, Todd's annual salary is $52,000. Here's how you would calculate Todd's hourly rate if he worked 40 hours a week:
- Take the gross salary rate and divide it by the 52 weeks that make up a year. This will find Todd's weekly gross pay. According to the calculation below, he makes $1,000 in a week.
- $52,000 ÷ 52 = 1,000
- $52,000 ÷ 52 = 1,000
- With his weekly salary in hand, you can then divide the $1,000 by 40 hours if he's a full-time employee. According to the calculation below, that means he makes $25 an hour.
- $1,000 ÷ 40 = $25
- $1,000 ÷ 40 = $25
The $25 hourly rate is if Todd works a full 40-hour week as a salaried employee. However, if he missed a day and a half in one week, you would need to prorate his salary based on that missing time. Here's the calculation for this:
- Multiply his normal hourly rate by the number of hours he missed. In this case, he missed 12 hours of his 40-hour workweek.
- $25 x 12 = $300
- $25 x 12 = $300
- After determining that his missed time amounted to $300, you subtract that amount from his normal weekly rate. As a result, that week will net Todd a total of $700. If this were to persist as per a new salary agreement or employment change, his annual salary will go from $52,000 to $36,000.
- $1,000 - $300 = $700
- $700 x 52 = $36,000
At its most basic, the formula can be explained this way:
- An employee's annual salary ÷ 52 weeks = weekly pay
- Weekly pay ÷ normal working hours = hourly wages
- Hourly wages x missed hours = reduction in pay
- Normal weekly pay - a reduction from lost hours = prorated salary
If you wanted to prorate a salary by a few missed days, you'd swap the hourly rates for daily ones. So, if a person normally works five days and they lose a day each week, you will adjust the calculation to reflect those changes instead of hourly changes.
Key takeaway: To calculate a prorated salary, basically, you need to multiply the employee's hourly wage by the number of missed hours. This entails a few simple equations if you don't already know their hourly wage.
When is an employee eligible for a prorated salary?
Salaried employees occupy a special niche within federal law. Under the Fair Labor Standards Act, most salaried employees are exempt from the overtime and minimum wage provisions as long as they make more than $684 per week. However, they are still protected under the FLSA and cannot have their pay lowered.
There are exceptions to the rule, of course. Along with the previously mentioned reduction in days or hours worked, there are several reasons why an exempt employee would receive a prorated salary:
- The employee starts a new job in the middle of a pay period.
- The employee is fired or laid off before the end of a pay period.
- Companywide or departmental furloughs reduce working hours.
- The employee takes off more time than they have available to them, or they take time off during a probationary period.
Exemptions from receiving a prorated salary
While it makes sense that a salaried worker would take a reduced paycheck if their worked hours reduced outside of normal circumstances, some possible reasons for that reduction deny you the ability to offer a prorated salary.
In instances where an employee is called away from work to perform a civic duty – like serving as a juror, testifying as a witness in a criminal case, or fulfilling military obligations – you cannot reduce their salaried pay. You can, however, deduct the lost time from your taxes as an offset.
Deductions are only allowed if you have a way to pay that employee those lost wages or the worker in question takes any unpaid leave per the Family Medical Leave Act. Pay reductions are also permitted if the employee is hit with unpaid disciplinary action or punishment for a safety violation that forces them to be out of work for at least a full day.