Legislative Update by Attorney Kathryn Johnson
When an employee has been injured and is entitled to temporary or permanent workers’ compensation benefits, a calculation of the employee’s average weekly wage and rate is required. In order to calculate the rate of compensation, the “gross earnings” of the employee must be determined and then converted to a weekly benefit rate. Correctly calculating the weekly rate at the onset of a claim can save insurers time, money, and headaches later on down the road.
There are various methods to determine an employee’s gross weekly earnings, otherwise known as the “average weekly wage” or “AWW”. The method of determining AWW will depend upon how the employee is compensated. Generally speaking, the majority of employees will be compensated on an hourly basis. For employees who are paid on a daily or hourly basis, or by the output of the employee (i.e. truck drivers), the method of calculating the AWW is determined by Iowa Code section 85.36(6). For these employees, the basic procedure for correctly calculating the weekly rate is to start by looking at the employee’s earnings immediately prior to the injury date, and find the first 13 weeks of “representative” earnings. This process can be reduced to the following formula:
The total weekly earnings during 13 representative weeks prior to the work injury ÷ 13 = AWW
The average of those 13 representative weeks is then applied to the rate table put out by the Iowa Division of Workers’ Compensation. The rate tables are set up to take the AWW, and reveal the correct weekly rate based on whether the injured employee is married or single, and how many exemptions the employee is entitled to claim. Generally, the weekly rate of compensation is 80% of the employee’s average spendable earnings at the time of the injury.
While this process may seem fairly straight-forward, the miscalculation of the AWW can be the cause of significant rate disputes that may result in interest on underpayment of benefits, unnecessary litigation expenses, and penalty awards. To avoid getting trapped into unnecessary expenses associated with a miscalculation of rate, utilize the following tips and tricks.
- To correctly calculate the AWW you will need to know the following information about the injured employee:
- Marital Status. An injured employee’s weekly rate will vary depending on whether the employee is married or single.
- Number of Dependents. An injured employee is entitled to one exemption for themselves, one exemption for their spouse, and one exemption for each of their dependents. Generally, a child can be claimed as an exemption for weekly rate purposes if the employee could claim the child as an exemption on their tax return.
- Length of time between pay periods.
- Weekly pay period – gross weekly earnings equal the weekly gross amount.
- Biweekly pay period – gross weekly earnings equal the biweekly gross amount divided by 2.
- Semimonthly pay period – gross weekly earnings equal the semimonthly gross amount multiplied by 24 and divided by 52.
- Monthly pay period – gross weekly earnings equal the monthly gross amount multiplied by 12 and divided by 52.
- Yearly pay period (salaried employees) – gross weekly earnings equal the yearly gross amount divided by 52.
- Method of Compensation. From the onset you will need to establish the amount and frequency of compensation (hourly rate, salary or other method of payment), as well as increases in compensation.
- In some cases, the classification of the employee. The classification of the employee may be necessary when calculating the rate of certain types of employees such as volunteer fire fighters, emergency medical providers and reserve peace officers. Special rate rules also apply to elected or appointed officials, proprietors, limited liability company members, partners, officers of a corporation, apprentices, trainees, and employees whose earnings have not been fixed or cannot be ascertained.
- Representative Weeks. When calculating the AWW, do not use the week of injury, but instead start with the week immediately preceding. The primary objective when calculating an AWW is to reflect earnings that fairly represent the employee’s customary earnings loss due to injury. Frequently, an employee’s wages will vary from week to week.
- Types of Compensation Included in the Weekly Rate Calculation. Certain types of payments to the employee must be included in the employee’s gross earnings.
- Regular Bonuses. Bonuses received on a regular basis are to be included in the employee’s gross earnings. For example, bonuses that are received by an employee on an annual basis or are a fixed amount per year, will likely be classified as a regular bonus, and should be included.
- Shift Differential. Shift differential refers to extra pay received by employees for working a less-than desirable shift (i.e., late nights, weekends). Shift differentials are to be included in the employee’s gross earnings. Therefore, if an employee is compensated at different rates depending on the shift, the earnings will be determined at the shift differential rates.
- Types of Compensation Not Included in the Weekly Rate Calculation. Certain types of payments to the employee are not used in calculating the weekly rate.
- Overtime pay. Overtime pay is not included in figuring the gross earnings of an employee. This means that the amount paid in excess of the rate the employee receives for straight time is not included. For example, the rate of an employee who is paid $10 per hour and works a 50 hour work week (with 10 of those hours being overtime at time and one-half) will be $500.
- Irregular Bonuses. A bonus may be irregular if it is conditioned upon the happening of a certain event, varies in amount, or is not fixed in terms of entitlement or amount. Irregular bonuses are not included in the employee’s gross earnings. This determination is fact-based and will require additional investigation.
- Other types of pay which are excluded include: fringe benefits, retroactive pay, reimbursement of expenses, expense allowances, and an employer’s contribution for welfare benefits.
- Non-Representative Weeks. When determining an AWW, count back until you have 13representative weeks of earnings. It is not uncommon for a non-salaried employee to find that there are weeks within the 13 consecutive weeks prior to the injury that contain absences due to illness, vacation or other causes.
If the employee is gone for reasons personal to the employee (such as vacation, holiday, or sick leave) during part of the 13 calendar weeks preceding the injury, than the gross earnings are determined as the amount that the employee would have earned had the employee worked when work was available. For instance, if an employee customarily works 40 hours per week, but in one week has 32 hours worked and 8 hours of vacation time, the earnings are based on the 40 hour work week had work been available for the employee during that time. This week would not be thrown out, but rather included within the 13 week average.
It is important to remember that it is the earnings that must be customary, not the weeks. If the week in question does not reflect customary wages earned by the employee, the week is thrown out and replaced with the next preceding fairly representative week. Always bear in mind that the determination of whether a week is included to arrive at rate is whether the weeks considered “fairly reflect the employee’s customary earnings.”
- Other Types of Employees. If the employee worked full-time at the time of the injury, earning the same amount each pay period, the method of computation depends on the length of time between pay periods. (See above.) Certain types of employees are subject to other rules of rate calculation.
- Part-time Employees. If the employee either earns no wages, or less than the usual weekly earnings of a regular full-time adult laborer in the employee’s line of work, the earnings are determined by the total of ALL earnings of ALL employment the employee has engaged in during the 12 months preceding the injury divided by 50. (Generally an employee who works less than 30 hours per week is considered part-time.)
- Employees who do not have 13 Weeks of Representative Earnings. In some instances an employee will be injured before he or she has accrued 13 weeks of wages prior to the injury. In addition to a careful analysis of causation, you must look to the earnings of “similarly situated employees” for the 13 weeks preceding the injury to determine the AWW.
- To do so, request wage records of employees in the injured employee’s same position, averaging the hours worked by the similarly situated employees at the injured employee’s straight time rate.
- If the earnings of other employees cannot be determined, the employee’s weekly earnings shall be the average computed for the number of weeks the employee has been in the employ of the employer.
- Convert the AWW to a Weekly Benefit Rate. Once you determine the employee’s gross weekly earnings, round to the nearest dollar, and apply the AWW to the rate table put out by the Iowa Division of Workers’ Compensation.
- If the employee is paid on an hourly basis (regardless of interval at which payments are made; weekly, biweekly, monthly or semimonthly) you will need to know the hours worked each week, both regular and overtime, rate(s) of pay, whether regular bonuses were paid, and whether the employee had time off for vacation, sick, holiday, or other personal leave during any week. You may need to speak with the employer’s payroll department and the employee’s immediate supervisor to better understand the employee’s work and compensation.
- For hourly employees, since a 13 week average is needed, the pay periods need to be broken down weekly to help you decide which weeks are representative. Those which do not fairly reflect the employee's customary earnings need to be excluded.
- Be sure the employer provides information regarding any pay increases and their effective dates. The employee’s personnel file is a good place to start to ascertain this information, but you may need to request actual time cards as well.
- Marital status and entitlement to exemptions are determined at the time of the injury, not when the claim is presented. Therefore, if an injured employee is single on the date of injury and subsequently gets married or has a child, they are still considered single with one exemption for rate purposes. If you take an injured employee’s statement, be sure to ascertain this information.
- The test for dependent status is whether or not the dependent could be properly included on the employee’s tax return. To help determine the employee’s dependents, request a copy of the employee’s tax return for the year in which the employee was injured. However, keep in mind that the employee’s tax return, while good evidence of dependent status, is not necessarily determinative of the issue.
- Remember that, although, AWW seems like a moving target, "§85.36 is to be applied flexibly, rather than mechanically or technically, with the ultimate objective being to fairly reflect the employee's earning loss."Daniels v. T&L Cleaning Services, File 1283486 (2003).
- The Iowa Division of Workers’ Compensation puts out tables on their website which can be used to determine compensation rate, however the easiest thing to do is to determine AWW and then usePeddicord Wharton’s free rate calculator which calculates the rate for you!
These tips and tricks are by no means an exhaustive list of everything there is to know about calculating weekly benefit rates in Iowa. However, they serve to provide the basic framework for rate calculation so that you can avoid getting trapped into unnecessary expenses associated with improper rate calculation. If you require assistance in calculating an injured employee’s AWW and rate, feel free to contact one of our firm’s attorneys and we will be happy to help you.
 Peddicord Wharton provides a free calculator to help quickly convert AWW to rate. Rate calculators can be found here .
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Peddicord Wharton Legislative Updates are intended to provide information on current developments in legislation impacting our clients. Readers should not rely solely upon this information as legal advice. Peddicord Wharton attorneys would be pleased to answer any questions you may have about this update. ©2018 Peddicord Wharton. All Rights Reserved.