As the saying goes, “It’s all in the timing” - and this is especially true during employment onboarding periods. The start (and end dates!) of a worker’s employment period sometimes do not coincide with the organization’s payroll period.
In a perfect world, the onboarding of a new hire would begin at the beginning of the company’s pay period, and departing employees would exit at the end of a defined pay period. Yet, due to countless reasons, among them being the need to begin a new position in a hurry or for a non-scheduled employee departure, chances are that an employee’s start and end dates will not fall in sync with the company’s pay schedule as administered by their payroll software.
In order to pay employees correctly and with legal compliance, it’s important for payroll administrators to know how to properly and accurately prorate salary and understand “what does prorated mean?”
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What is a prorated salary?
In most circumstances, salaried employees are entitled to receive their full, standard salary as long as they work some part of a workweek, regardless of the total days or hours. However, in some cases, depending on factors such as company policy, contract stipulations, or reason for leaving, employers may be required to issue a prorated salary to employees serving notice.
Reasons to provide a prorated paycheque
For the employer, implementing prorated salary payments may improve cost efficiency. On the other hand, for employees, a prorated salary is generally offered for the following reasons:
- They departed from a company or joined a company in the middle of a payroll cycle
- They had a raise take effect in the middle of a payroll cycle
- Received an annual bonus before working a full calendar year
- If they get suspended without pay for one or more full days due to misconduct
- They get terminated in the middle of a pay period
- Furloughs and reduced hours – an involuntary leave in which employers temporarily reduce employees’ salaries or hours. Employees keep their jobs, but if pay or hours are reduced, a prorated salary is calculated for their pay
How to prorate salary: an example
In this example, an employee will earn an annual salary of $60,000 on the agreement of working 40 hours per week, which will be paid weekly. If the employee only works three days during their first week of employment, how do you prorate salary? The answer is in this formula:
- $60,000 annual salary paid based on working 2,080 hours a year. This is calculated by multiplying 40 hours a week by 52 weeks a year, which equates to a $28.85 hourly rate of pay
- Multiply $28.85 by 24 hours (three days of working eight hours a day) this equates to $692.40 in prorated wages. In this same scenario, here is the formula for how you prorate monthly salary:
- $60,000 annual salary divided by 12 months equals $5,000 a month in prorated wages
How to prorate salary for a pay raise
When a pay raise is warranted, due, and ultimately put into place, the most effective and simple method of issuing it properly to the employee is to have the increase take effect at the start of a new pay period. This would eliminate the need to calculate prorate pay and simplify the job for payroll administrators.
However, if for whatever reason, this is not feasible, employers will need to prorate the employee’s salary for two rates. One rate for the initial (before raise) salary during the time they worked before the raise came into effect and another rate for the increased (raise included) salary.
In this case, the right payroll software in place not only simplifies the job of the payroll administrator and leaves less room for error but also makes it clear to the employee what amounts they were paid for during each period (before and after their raise came into effect) on their statements.
Frequently asked questions
Why is it important to know how to calculate prorated salary?
In any business, the controlling of costs, both internal and external is crucial to the bottom line or the bread and butter that keeps the company profitable. Internally, for payroll administrators, knowing how to prorate salary is a very important element of controlling payroll costs. Therefore, it is crucial for payroll staff to be educated, experienced, and accurate when calculating a prorated salary. If employers do not know how to perform the prorated calculations correctly, they could end up underpaying salaried employees for time worked or overpaying them for time not worked. This would, in turn, mean having to recoup the overpayment from the employee, which would entail - as per the Canada Revenue Agency - providing a letter to the employee confirming the following information:
- Reason for the overpayment
- Date the overpayment was included in the employee’s income
- Date and amount of the repayment
The employer, via the payroll administrator, must also include the overpayment and corresponding deductions on the employee's T4 slip. Should the above not be performed or ruled as not worth pursuing, the company would have to absorb the loss of the overpayment, which is not likely to reflect well on the payroll administrator who allowed the error to occur.
What do I do if a prorated salary is incorrect?
In most cases, a prorated salary is less than what an employee usually earns in a typical pay period. In the event of the payment being incorrect, as in the employee is not given the full amount to which they are entitled, the employer, via the payroll administrator, would need to issue back pay for the amount still owed to the former employee, or in some cases, recoup any overpayment in taxes, or adjust tax deductions over time. This would also include:
- Wages for hours worked including overtime
- Vacation pay
- General holiday pay
- Severance pay
- Pay in lieu of notice of termination of employment
This is, indeed, a worst-case scenario and could result in having an employee who is owed a prorated salary feel the need to turn to the Government of Canada’s plethora of resources for assistance in pay recovery. That would most likely be confusing and time-consuming. Having the right payroll software in place is a simple and easy troubleshooting solution.
How does prorate salary work in the case of hiring or termination?
When an employer hires or fires an employee in the middle of a pay period, they will typically apply a prorated salary. The amount they pay a newly hired employee corresponds to the number of days worked during the pay period. The next paycheck includes their full, agreed-upon salary. If an employee quits or is terminated in the middle of a pay period, the employer applies the same rule, paying them only for the days they worked.
How do I negotiate a prorated salary?
A prorated salary is calculated as a percentage of an overall salary, so the most important factor in negotiating a prorated salary is the full salary amount. Upon hire, new employees can negotiate their starting salary, raise amounts over predetermined time periods, and in some cases, ask for better probation terms such as:
- If an employer mandates a probationary period for new hires before they can earn their paid time off, the employee can negotiate a shorter period of probation in exchange for the employer issuing prorated pay in an agreed-upon circumstance
- If an employer prorates annual bonuses, the employee can instead, negotiate a full bonus
- If an employer prorates a salary increase, the employee can negotiate to receive the full increased salary for the entire pay period
Learn More
Need help with prorating your employees’ salary? ADP offers payroll software that’s easy, affordable, and available for all business sizes. Let us take care of your payroll so you can focus on other business objectives. Talk to our sales team today at 866-622-8153 or start a quote and find the right payroll solution for your business.
This guide is intended to be used as a starting point in analyzing how to prorate salary and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.