What are Prorated Salaries?

At some point, most employers will need to adjust an employee’s salary, a process known as prorating. This adjustment is often necessary when an employee joins or leaves the organization in the middle of a pay period. While prorated salaries may initially seem complicated, understanding when and how to apply proration can help ensure compliance and provide peace of mind. This guide explains the concept of prorated salaries, including when employers can use them and how to calculate them accurately.

A prorated salary refers to the adjustment of an employee’s salary in proportion to the number of days worked during a specific pay period. This typically occurs when an employee begins employment mid-pay period, receives a pay raise, or takes unpaid leave. For example, if an employee starts work halfway through a biweekly pay period, their paycheck will reflect a portion of their salary based on the actual days worked, rather than the full period.

When Can Employers Prorate Salaries?

Prorated salaries apply only to exempt employees. Nonexempt employees, who are paid hourly, are not eligible for prorated salaries because they receive wages only for their hours, including overtime for hours worked beyond 40 in a week.

To qualify as an exempt employee under the Fair Labor Standards Act (FLSA), an employee must earn at least $684 per week (or $35,568 annually) and perform administrative, professional, or executive duties. These job responsibilities, not the job title, determine whether an employee is exempt from overtime regulations.

Employers cannot reduce an exempt employee’s salary if they have worked any portion of the week. However, there are specific situations where proration is allowed:

• Mid-period hiring or termination: An employee who joins or leaves in the middle of a pay period will have their salary prorated.
• Pay raise during a pay period: When an employee receives a pay increase in the middle of a pay period, their salary for that period is prorated to reflect the change.
• Unpaid leave: If an employee takes unpaid leave during a pay period, their salary can be prorated accordingly. This includes unpaid leave under the Family and Medical Leave Act (FMLA).
• Unpaid disciplinary action: In cases where an exempt employee faces unpaid disciplinary action, their salary can be prorated.
• Unpaid personal or vacation days: If an exempt employee takes unpaid personal or vacation days and is not eligible for paid time off (PTO), their salary may be prorated.
• Furlough or reduced hours: When an exempt employee’s work hours are reduced or they are furloughed, proration is applied to their salary.

How to Calculate a Prorated Salary

Calculating a prorated salary involves determining the employee’s daily or hourly pay based on their annual salary. For most salaried employees who work a standard five-day workweek, employers can follow these steps:

• Calculate the weekly salary: Divide the employee’s annual salary by 52 (the number of weeks in a year). For example, an employee with an annual salary of $40,000 would have a weekly salary of $769.23.
• Determine daily pay: Divide the weekly salary by the number of workdays in a week. In this case, dividing $769.23 by 5 gives a daily rate of $153.85.
• Calculate the proportion of days worked: If the employee worked less than the full number of days in the pay period, determine the percentage of days worked. For example, if they worked 3 out of 5 days in a weekly pay period, divide 3 by 5 to get 0.6 or 60%.
• Multiply by the prorated percentage: Multiply the employee’s weekly salary by the percentage of days worked. Using the previous example, $769.23 multiplied by 0.6 equals $461.54, the prorated salary for that week.

Prorating Due to a Pay Raise

When an employee receives a raise in the middle of a pay period, prorating is slightly more complex. Employers must first calculate the prorated amount for both the original salary and the new salary, then combine the two amounts for the final pay.

For instance, if an employee is promoted on the 10th day of a 20-day pay period, their original salary will apply to the first 10 days, and the new salary will apply to the remaining 10 days. The prorated amounts for both salaries must be calculated and added together to reflect the correct pay.

Common Mistakes in Prorating Salaries

Prorating an employee’s salary incorrectly can result in compliance issues and wage law violations. To avoid such mistakes, ensure that:

• The employee qualifies as exempt under the FLSA.
• The correct pay periods and workdays are considered in the calculations.
• Prorating is applied only in legally acceptable situations, such as hiring, termination, unpaid leave, or pay raises.

Employers should also consult legal counsel or a payroll expert when in doubt about prorating salaries, especially for more complex scenarios like layoffs or reduced work hours.

Conclusion

Prorating an exempt employee’s salary is essential in certain situations, such as hiring mid-period or adjusting pay for unpaid leave. Understanding when proration is allowed and knowing how to calculate it properly can help employers stay compliant with wage laws. By following the correct steps for prorating salaries, employers can ensure they compensate their employees fairly and avoid potential legal complications.

For further assistance with payroll management and compensation best practices, contact TPG Insurance Services today at 909.466.7876!

Also, learn about the Advantages of Administrative Service Organizations and check out the 8 Reasons Why Handling Payroll on Your Own May Not Be The Best Idea.