Before we get into this article, let's start by explaining what "Prorate" means.
In simplest terms, "prorating pay" means calculating how much you need to pay an employee for the time they worked within the pay period.
For example, suppose the employer has a two-week pay period, and a salaried employee starts their first day on Monday of the second week in the pay period. In that case, their first pay cheque will be prorated to include only the week they worked within the two-week pay period.
This means their first pay cheque would be exactly half of their regular pay cheque when they work for an entire 2-week pay period.
To pay them correctly, Humi "prorates" their regular pay and only pays the employee for the week they worked within the two-week pay period.
There are many different scenarios where an employee can receive a prorated salary, including:
- Getting hired at any time within a pay period
- Getting terminated at any time within a pay period
- Getting a promotion with a pay raise at any time within a pay period
- When earning "Other Income" that's based on hours, and not their "Regular Pay." For example, holiday pay or sick pay.
As you can see from these examples, we only prorate regular pay when compensation changes are made in the middle of the pay period.
Each company has their policies for how they prorate their salaried employees' regular pay.
At Humi, we always recommend you seek the advice of an accountant to make sure your methods are in line with the Employment Standards Act (ESA) for your province.
How Humi prorates regular pay
Humi prorates regular payment based on the guidelines set out by the National Payroll Institute (NPI), (formerly the Canadian Payroll Association [CPA]). This method uses "260" as the number of working days in a year to determine the employee's daily pay rate.
If you're wondering, "where did they get the number 260 when there are 365 days in a year?" Remember: this doesn't include weekends (5 days a week x 52 weeks = 260 days).
Steps Humi takes to make a proration when an employee is hired, terminated, or receives a new salary mid-period:
1. Take the employee's current wage(s) and divide it by 260.
Let's use a fictional example employee, Daniel, as an example. His salary is $50,000.
To find his daily wage, we do this calculation: 50,000/260 = $192.31
2. Determine the number of payable days he worked during the given period (this includes any stat holidays and excludes weekends).
Daniel's pay schedule is biweekly, and he started on Tuesday within the second week of the pay period. Since he worked from Tuesday to Friday, this means he only worked four payable days.
3. Multiply the daily rate by the number of days worked
Daniel will get paid - $192.31 (Daily rate) x 4 (payable days worked within the pay period) = $769.23
4. Humi sets that amount as the employee's regular wages, prorated for the given period.
Note
If you'd like to edit the prorated calculation, click into the regular pay and input a new amount.
Steps Humi takes to make a proration when an employee earns Other Income that is based on hours:
1. Take the employee's current wage(s) and divide it by 260.
Let's use a fictional example employee, Daniel, as an example. His salary is $50,000, and he works 37.5 hours per week.
To find his daily wage, we do this calculation: 50,000/260 = $192.31
2. Determine the number of hours the employee works in a day.
To find Daniel's number of hours worked per day, we take the hours per week from his salary compensation and divide that number by 5 days.
We do this calculation: 37.5 / 5 = 7.5 hours per day.
3. Determine the "Hourly Rate."
To find Daniel's "Hourly Rate," we take his daily wage and divide it by his hours per day. To ensure total accuracy, Humi will round the Hourly Rate to 4 decimal places, or 1/100th of a cent.
We do this calculation: $192.31 / 7.5 = $25.6410
We hope this provides a little more clarity as to how Humi prorates regular pay!