How Average Weekly Wages and Work Comp Indemnity Payments Work

The term “average weekly wage” is often used in the discussion of workers’ compensation claims. As it is the foundation on which almost all workers’ compensation indemnity payments are based, let’s discuss it in detail.

The average weekly wage (AWW) is the amount of income the employee earned per week at the time of the workers’ compensation injury or work related illness. [In some states it is referred to as the “state average weekly wage” (SAWW). In this discussion we will use AWW throughout].

Determination of the AWW:

The amount of income an employee averages per week seems simple enough, but when state governments get involved in the determination of how AWW is calculated, it becomes more complex.

Most states calculate the average weekly wage over the last 12 months, but in a few states the average weekly wage is based on the last 90 days. Let’s look at some of the ways AWW can be calculated (with the caveat that with 50 states, the U.S. Territories and the District of Columbia each doing their own thing, there can be an exception to almost all of the following points):

1. If the employee’s weekly income does not change, for instance the employee is on a weekly salary, the amount of the AWW is easy to determine.
2. For workers paid a monthly salary, the monthly salary is multiplied by 12 and then divided by 52 to determine the AWW.
3. For hourly workers, the number of hours per week is multiplied by the hourly wage to get the AWW.
4. For workers paid by the number of pieces of production, or paid commission or paid mileage (truck drivers paid by the mile), the total income earned over the last 12 months is divided by 52 to determine the weekly income.
5. For workers paid a daily rate or on a per diem basis, the daily amount is multiplied by the number of days worked in the last 12 months and then divided by 52 to determine the AWW.

General Add-Ons:

Just when you think you understand the calculation of the AWW, several states, territories, and District of Columbia have their own ways of adding to the AWW calculation. Depending on the jurisdiction, the AWW has been expanded to include:

1. Overtime pay
2. Bonuses
3. Health insurance and dental insurance if the employer does not continue to provide it while the employee is off work due to the work comp claim.
4. Rent, housing, lodging if the employer was providing it before the work comp injury but does not provide it after the work comp injury.
5. Tips over and above the hourly rate paid to waiters and waitresses.
6. Per diem amounts paid over and above salary or commissions, if they are reported as income for income tax purposes

Cringe Factor Add-Ons:

Now that you think you understand the AWW is the employee’s income plus any other employer provided compensation, we get some more add-ons causing employers to cringe when they hear about them . . . such as:

1. The double dippers:Your employee John Doe started working for your company two years ago. Doe’s regular hours are 8 a.m. to 4 p.m. Two weeks ago Doe took a second job working 4:30 p.m. to 12:30 a.m. Today he hurts his back at your company (really questionable injury, but he will be out of work a couple of months before the adjuster and/or nurse case manager can convince the doctor to get him back to work).

Guess what . . . . in most states your company does not pay John Doe the AWW based only on your company’s job if he is also unable to work his second job. The employee is paid the AWW plus add-ons from both jobs by your work comp insurance! [In an effort to be fair to employees who work two jobs, the states who require this add-on have inadvertently created a situation sure to invite employee fraud].

2. The gone but not forgotten worker:Employee Jane Doe (sister of the double dipper John Doe) also worked for your company. After returning to work after her own work comp injury, she leaves your company’s employment for a much higher paying job at her new employer. After working for her new employer for over a year, Jane Doe’s medical condition worsens from her work comp injury sustained when she worked for your company and now she is unable to continue to work per the work comp treating doctor.

Guess what . . . . in some states you reopen her work claim, but you do not pay her the AWW from her work at your company — you pay the AWW for the work at her new employer!

Calculation of Benefits Using the AWW:

Each of the states, territories and DC use a percentage of the AWW to calculate the amount of benefits to be paid. One hundred percent of the AWW is not used because the employee does not “take home” his total income. The employee has to pay out of the AWW his federal income tax, state income tax, city income tax, social security, Medicare, benefit contributions, union dues, etc.

While most states used sixty-six and two/thirds percent (66.66%) of the amount of the AWW to calculate indemnity benefits, a couple of states use seventy percent (70%) and a few states use eighty percent (80%) of “spendable income” or “after tax” income. All jurisdictions impose a cap, a maximum amount of benefits the employee can receive each week, regardless of the AWW. The states vary tremendously in this aspect, with state caps on weekly indemnity benefits at the top of the range being more than twice what the state cap amounts are on at the bottom of the range.

While two-thirds of the AWW seems reasonable, in most work comp claims the employee is receiving less than he would have if he was not injured and continuing to work. This encourages the employees to return to work when they are physically able to do so. However, in some states that have high state income taxes and the state weekly indemnity benefits cap is high, the employee is receiving more per week on work comp then he would take home after paying taxes, benefits, union dues, etc. This situation makes it difficult for the workers’ comp adjuster to get some procrastinating employees back to work.

Some states require the work comp adjuster to submit to the Industrial Commission a state form outlining how the AWW was calculated and how the indemnity benefits are calculated. Other states do not get involved in the calculation of the AWW and the resulting indemnity benefits unless a dispute arises between the employee and the employer over what is the correct amount of the AWW.

Summary:

As the indemnity benefits are based on the AWW, it is in the employer’s best interest to be sure the employee’s AWW information reported to the work comp claims office and/or the work comp insurer is correct. If there is any doubt on what to include in the AWW for your state, use your state’s form for reporting the AWW information, if your state uses one. If not, consult with your work comp adjuster on any questions on how to calculate the AWW for your particular state. Also, you may contact us for assistance. See: 50 State Laws and Regulations at http://reduceyourworkerscomp.com/laws_and_regulations.php

Author Robert Elliott, executive vice president, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, health care, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. He can be contacted at: [email protected] or 860-553-6604.

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