How to Calculate Average Weekly Wage (AWW) for Workers' Comp

When an employee is injured on the job and files a workers' compensation claim, the compensation they receive for their lost wages is a critical aspect of the overall benefits package. In many jurisdictions, the amount of wage replacement benefits that an injured worker is entitled to is determined based on the Average Weekly Wage (AWW). This is a crucial calculation, as it forms the foundation for determining temporary or permanent disability payments and ensures that the employee's compensation is fair, equitable, and reflective of their earning capacity.

The Average Weekly Wage (AWW) is not simply a matter of looking at a worker's paycheck. In fact, there are many nuances and variables that affect the way it is calculated, depending on the jurisdiction, the nature of the injury, and the worker's employment situation. This article will explore how to calculate AWW for workers' compensation, including the factors that influence the calculation and the variations in different states or countries. We will also look at real-world examples to help clarify how the AWW is determined and its implications for the injured worker.

What is Average Weekly Wage (AWW)?

The Average Weekly Wage (AWW) is the method used by insurance companies, employers, and workers' compensation boards to calculate how much a worker was earning on a weekly basis before they were injured. This figure is used to determine how much wage replacement the worker should receive while they recover from their injury. The AWW typically serves as the basis for calculating temporary total disability (TTD) and permanent partial disability (PPD) benefits, among others.

The formula for AWW typically looks at the worker's gross earnings over a certain period before the injury occurred. These earnings may include not only regular wages but also overtime, commissions, bonuses, and other forms of compensation that the employee was receiving as part of their regular earnings.

It is essential to understand that the calculation of AWW is not uniform and can differ depending on various factors. These factors include the specific jurisdiction (since workers' compensation laws vary by state or country), the length of time the worker was employed, the method of compensation, and more.

Why is AWW Important?

The AWW plays a pivotal role in workers' compensation cases because it serves as the benchmark for determining wage replacement benefits. Without an accurate calculation of the AWW, the worker may either receive insufficient benefits or be overcompensated. Both outcomes can lead to legal complications, delays in benefits, and inequitable outcomes for the employee or employer.

In particular, the AWW is crucial because:

1. Determines Wage Replacement: The primary purpose of workers' compensation is to replace lost income due to work-related injuries. The AWW directly impacts the amount of weekly wage replacement a worker will receive during their recovery.
2. Establishes Fair Compensation: An accurate calculation of AWW ensures that workers receive benefits that are proportionate to what they were earning before their injury. If a worker was regularly earning overtime or receiving bonuses, this should be factored into their AWW to ensure they are compensated fairly.
3. Helps With Long-Term Disability Benefits: For individuals who are permanently disabled due to a work-related injury, the AWW is crucial in determining long-term disability compensation, which could continue indefinitely or for a set period of time.

How is AWW Calculated?

To calculate AWW, a straightforward approach would be to average the employee's earnings over a specified period, typically the 52 weeks leading up to the injury. However, this calculation can vary depending on how the employee was paid, the nature of their work, and the specifics of the workers' compensation law in the jurisdiction where the claim is filed.

Here are the steps typically involved in calculating AWW:

1. Determine the Base Period for Earnings

The first step in calculating AWW is to determine the "base period" for the employee's earnings. In many jurisdictions, this period spans the 52 weeks (one year) immediately before the worker's injury. However, the length of the base period can vary based on specific rules in different areas.

In some cases, the base period may be shorter, especially if the worker was employed for less than 52 weeks. For example, if a worker has been employed for just six months, their AWW might be calculated based on the earnings during that period, or an alternative calculation might be made based on the worker's average weekly wage over the entire duration of employment.

2. Identify and Include All Relevant Earnings

The next step is to determine which earnings should be included in the calculation. Workers' compensation typically includes all forms of compensation that contribute to the worker's income, including:

• Hourly Wages: Regular pay for the hours worked.
• Overtime: If the worker regularly worked overtime, that pay should be included in the calculation.
• Commissions: For workers who earn commissions, such as salespeople, commissions earned during the base period should be included.
• Bonuses: Certain bonuses, such as annual or quarterly bonuses, may also be included if they were regularly paid and were part of the worker's usual earnings.
• Tips: In jobs where employees receive tips (such as servers or bartenders), tips are typically included as part of the AWW calculation.
• Fringe Benefits: In some cases, fringe benefits like housing, car allowances, or meal stipends may be factored in if they were part of the worker's compensation package.

It's important to note that not all benefits or forms of compensation are always included. For instance, some jurisdictions do not count reimbursements for business expenses or one-time bonuses as part of the AWW calculation.

3. Calculate the Average Weekly Wage

Once you have identified all relevant earnings, the next step is to calculate the total income over the base period. The calculation process generally follows these steps:

1. Add Up All Relevant Earnings: Sum all wages, overtime, commissions, bonuses, and other forms of compensation received by the worker during the base period.
2. Divide by the Number of Weeks in the Base Period: To determine the AWW, divide the total earnings by the number of weeks in the base period. If the base period is 52 weeks, this is a straightforward division. If the base period is shorter (e.g., 6 months), divide by the number of weeks in that shorter period.

Example 1: Simple AWW Calculation

Let's say an employee was earning the following during the past 12 weeks before their injury:

• Regular wages: $500 per week
• Overtime: $150 per week (regular)
• Bonus: $300 paid quarterly, which equals about $75 per week

Total earnings over the 12-week period:

• Regular wages: $500 x 12 = $6,000
• Overtime: $150 x 12 = $1,800
• Bonus: $75 x 12 = $900
  Total earnings = $6,000 + $1,800 + $900 = $8,700

Now, to calculate AWW, we divide by 12 (since we're using a 12-week base period):

AWW = $8,700 ÷ 12 = $725

In this case, the worker's AWW would be $725, and their weekly wage replacement benefits would be based on that amount.

4. Adjust for Any Special Circumstances

In some cases, special circumstances may apply. For instance, if the worker was on a leave of absence, had intermittent employment, or experienced a significant pay fluctuation, adjustments may be necessary. Some workers' compensation laws allow for averaging pay over a longer period or using a different approach to ensure that the AWW calculation is as fair and representative of the worker's typical earnings as possible.

Factors That Affect AWW Calculation

While the basic calculation of AWW is relatively straightforward, there are several factors that may affect how the final figure is determined. These include:

1. Irregular Work Schedules

For workers with irregular work schedules, such as part-time employees or those working on a seasonal basis, calculating the AWW can be more complex. In these cases, jurisdictions may allow for averaging the wages over a longer period or using a method that accounts for fluctuations in hours worked.

2. Multiple Jobs

If the worker held more than one job at the time of their injury, the AWW calculation may need to account for the income from both jobs. This is especially common for workers in industries such as retail or the gig economy, where employees may hold multiple part-time positions.

3. Self-Employed Workers

For self-employed workers, determining AWW can be more challenging. The calculation will generally rely on the worker's earnings for the year before the injury, as reported on their tax returns. However, variations can exist depending on the jurisdiction's rules.

4. State-Specific Rules

Different states or countries have unique guidelines for how to calculate AWW, especially concerning what is included in the calculation. For example, some jurisdictions may exclude overtime pay or bonuses, while others will include them. Always check with your local workers' compensation board to understand the specific rules in your area.

Conclusion

Calculating the Average Weekly Wage (AWW) is an essential step in the workers' compensation process, as it determines the amount of wage replacement a worker will receive following a work-related injury. Although the basic principles behind calculating the AWW are relatively simple---averaging the worker's earnings over a specified period---the actual process can be more complex depending on the worker's employment situation, local regulations, and other factors.

For employees, understanding how AWW is calculated can help ensure that they receive the proper compensation. For employers, knowing how to calculate AWW accurately can prevent costly mistakes and ensure compliance with workers' compensation laws. Whether you are a worker navigating the claims process or an employer managing compensation, an accurate understanding of AWW is crucial to ensuring fair and equitable outcomes for all parties involved.

View Product