Two freelancers in coworking space | What is pro rata?

Contents

  1. 1. What is pro rata pay?
  2. 2. Advantages and disadvantages of pro rata pay
  3. 3. How to calculate pro rata pay
  4. 4. How to calculate pro rata holiday pay
  5. 5. Is pro rata right for your business?

What is pro rata?

October 6, 2021
Your small business is growing. Revenue is increasing, more and more clients are coming in, and you’re in a position where you think it’s time to scale.
A common obstacle to business growth, however, is the limited budget that small businesses have. Recruiting new team members can get quite expensive: the average cost of hiring a new employee in the UK is around £9,183 per worker.

 So, how can you scale and grow your team without hurting your budget? A common solution is to hire part-time employees and apply pro rata wages (or paying a proportional salary equivalent to hours worked). This lowers your costs and offers you more flexibility. In this post, we’ll go deep into what pro rata pay consists of, the benefits and drawbacks that come with this payment model, and how you can calculate the pro rata pay for your small business’ part-time employees. 

What is pro rata pay?

Pro rata (or proportional rate in full) refers to the pay you’re providing to part-time employees based on their work hours. In other words, the money you're paying them is proportional to the work they’re putting in for your business.

For example, let’s say that your employee’s salary in a 40-hour week is £35,000 annually, but you hire them to work 20 hours each week. To calculate their pro rata pay, divide the annual salary (£35,000) by the total number of weeks in a year (52) to get the weekly salary. £35,000 / 52 = £673.Next, divide the weekly salary by a 40 hour work week to get the hourly rate.£673 / 40 = £16.8Then, multiply the hourly rate by the part-time work hours to get the weekly pro rata salary.£16.8 x 20 = £336.Finally, multiply the weekly pro rata salary by the total number of weeks in a year to get the annual pro rata salary:£336 x 52 = £17,472 (annual pro rata salary)Pressed for time? We've covered all you need to know about pro rata pay in the video below.

Advantages and disadvantages of pro rata pay

Before deciding to hire part-time employees and pay pro rata wages, it’s vital to understand its pros and cons for your small business.

Here are some common benefits and drawbacks to help you make the best choice:

Advantages of pro rata pay

More flexibility

Part-time employees are in a position where they can create their own schedules, making them more flexible. As a result, applying pro rata wages allows you to recruit talent that can work on weekends or holidays.Having flexible workers will also be helpful when someone on your team is absent or can’t show up for work. You can call them to replace the employee for the day and continue to get things done in the workplace with minimum setbacks.

Reduced payroll and benefits costs

With a pro rata salary, you’re paying employees strictly for the hours they’re putting in—nothing more, nothing less. Your small business will be saving money and incurring fewer payroll costs as a result. On top of that, you’ll also be spending less money on benefits. The simple reason is that workers receive benefits proportional to the hours they’re working, which drastically reduces your benefits costs overall. 

Disadvantages of pro rata pay

High turnover

The drawback of hiring part-time workers for your team is that they can be less committed to your small business. Consequently, it makes them high-risk for employee turnover and can reduce your workplace retention. While one goal of hiring part-time employees might be to save money, also keep in mind that employee turnover can come at a high cost. 

Possible tension between full-time employees

Employing both part-time and full-time employees could potentially create friction within your team. Full-time workers might view part-time employees as less committed to the business since they aren’t there as often and may not be as evangelised to advocate the company’s mission. Subsequently, part-time workers may feel less motivated to contribute to company goals, which can cause varying degrees of tension between ‘fully’ and ‘partially’ committed team members. 

How to calculate pro rata pay

If you plan on hiring part-time employees, it’s critical that you pay their wages and benefits accurately to avoid any issues with work laws. Here’s how you can identify which pro rata wage you should be paying to your part-time employees:

Prerequisites

As outlined in our earlier example, first, identify how much the employee would earn annually if they worked full-time in the position. Next, determine how many hours the part-time employee will be working at the job, which largely depends on the type of work they’ll be doing and your budget. 

Start calculating the pro rata wage

Once you have the prerequisites covered, follow these four steps to calculate your pro rata wage:
    Divide the full-time annual salary by the # of weeks (52). To get the hourly rate, divide the result by 40 (the standard weekly hours). Multiply hourly rate by # of hours worked per week. Multiply this by 52 to get the annual pro rata wage.

Pro rata example

Let’s dive into another example. This time, the employee is working 25 hours a week and the annual salary is £20,000:
    £20,000 (annual salary) / 52 (number of weeks) = £384.6 (weekly salary for full-time employee) £384.6 (weekly salary) / 40 = £9.6 (hourly rate) £9.6 X 25 (hours worked per week) = £240 (weekly salary for part-time employee) £240 (weekly salary for part-time employee) X 52 (number of weeks) = £12,480 (pro rata salary)

How to calculate pro rata holiday pay

Pro rata holiday pay example

Let's say that your part-time worker is employed for three days per week. Here’s what you need to do to calculate their pro rata holiday pay:3 X 5.6 = 16.8 days
That’s it! To double check your calculations are correct, you can use the GOV.UK holiday entitlement calculator.

It’s worth noting that part-time workers are also entitled to proportional sick day leave, maternity leave, redundancy, pension opportunities, and more. 
However, through what's classified as ‘objective justification’ it’s up to you, within reason, to decide if the costs are disproportionate to the benefit they're entitled to, and adjust if need be.

Is pro rata right for your business?

Whether or not you should be hiring part-time for your company depends on your unique needs. If you’re currently working on scaling your business while aiming to keep costs low, it may be a good fit. Before making any decisions, run some pro rata pay calculations to gauge hiring costs and consider the pros and cons to ensure it’s the best model for your small business growth.
Caroline Wire
Caroline WireFreelance Copywriter

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