Michigan WC Update: Fringe Benefits and Average Weekly Wage – How does it all add up?
Calculating the average weekly wage (AWW) to determine wage loss benefits is a routine, but critical part of the worker’s compensation case analysis. While the benefit calculator simplifies the math, the decision to include or not to include certain line items in the AWW calculation can be a fluid evaluation.
The method of calculating AWW is governed by Section 371(2) of the Michigan Worker’s Disability Compensation Act, and the statute provides that the AWW is based on wages earned in the highest paid 39 of the 52 weeks before the injury. This total is then divided by 39. If the employee worked less than 39 weeks, the AWW is calculated by dividing the total wages earned by the total number of weeks actually worked.
There are several benefits that can potentially be included in the AWW, such as bonus pay, pension benefits, health insurance premiums, vacation pay and holiday pay. Employers must also consider whether fringe benefits should be included with the cash wages in the AWW. Fringe benefits that do not continue during disability are added to the cash wages to determine AWW. However, while there is no limit on the inclusion of wages in the AWW calculation, Section 371(2) specifically states that fringe benefits can only be included “to the extent that the inclusion of the benefit will not result in a weekly benefit amount that exceeds two-thirds of the state average weekly wage at the time of the injury.”
The Act also requires an initial calculation of AWW without regard to any potential fringe benefits:
If the cash AWW is greater than the two-thirds limit, the final AWW is equal to the cash AWW, and no fringe benefit can be included.
If the cash AWW is lower than the two-thirds limit, the fringe benefit is included to the extent that the calculation does not exceed the two-thirds limit.
If inclusion of the fringe benefit puts the AWW over the two-thirds limit, the final AWW calculation is two-thirds of the state AWW.
How do you properly identify wages versus fringe benefits? The answer to this question is largely explained in case law.
Bonus pay can be included as wages, and not as a fringe benefit, if it is a fundamental aspect of the basic wages paid to employees at the company. Robertson v. George Belfer Drum & Barrel Co., Inc., 1999 ACO #580. This analysis focuses on whether the bonus pay is distributed at the end of every pay period or whether it is distributed at the end of a different or specific pay period. Pesavento v. Menard, Inc., 2010 ACO #15. Per diem payments can be classified as fringe benefits to be included in the AWW calculation so long as they do not represent a direct reimbursement for expenses the employee incurred. See Stinnett v. Spalj Construction Co., 2005 ACO #244.
As a general rule, payments issued directly to the employee are wages, while payments made to another entity are considered fringe benefits. For example, a commission is paid to the employee and is usually includes as wages, while health insurance premiums and employer pension contributions are paid to an insurance company or pension fund and are often classified as fringe benefits. The plaintiff bears the burden of proving the value of a fringe benefit.
The classification of vacation pay and holiday pay is a common fringe benefit analysis. These benefits may be classified as either wages or fringe benefits, and the determination involves a fact based inquiry. Where holiday or vacation pay is distributed as a percentage of hours paid on accrual during each pay period, the funds are classified as wages. In contrast, if the funds are paid when the employee actually takes the vacation, the funds are classified as fringe benefits. It is important to remember the inclusion of fringe benefits in the AWW calculation is subject to the two-thirds limitation noted above. In addition, vacation and holiday pay can be included as either wages or fringe benefits, but not both. If first classified as wages, they cannot be included again as a fringe benefit. Gaines v. Alma Prods Co, 1999 ACO #55.
Other important analyses include pension benefits, fringe benefits that are continued and then terminated, taxable versus nontaxable benefits, and benefit rate changes.
The takeaway from the employer’s perspective is that the fringe benefit analysis is more favorable when specific funds or benefits are classified as fringe benefits (subject to the two-thirds limit) as opposed to wages (no inclusion limits). This can potentially result in the use of a lower benefit rate in the wage loss analysis and the value of any settlement agreement reached to redeem a case.
Thanks to I&F partner Jynnifer Cotharn for this informative summary. If you have any questions regarding AWW calculation in Michigan, or any of the other states covered by I&F, please feel free to reach out to us.