Average earnings

What it means

Average earnings is an hourly figure derived from gross pay and hours worked in the previous calendar quarter. It applies from the first day of the next quarter.

It is not an average of payslips. Pay for work, premiums included, goes in, but not wage compensation or payments that are not remuneration for work.

Because average earnings are hourly, they are multiplied by hours, not days. Holiday pay for a day off is therefore calculated on the hours the employee was scheduled for that day under their working time, so someone on longer shifts gets more than a colleague on shorter ones even with the same hourly average.

How it works in practice

It drives holiday pay, compensation for absences, severance and premiums tied to the average. One figure therefore shapes nearly every non-wage payment.

If the employee worked fewer than 22 days in the previous quarter, probable earnings are used instead. That is normal on joining, after long sick leave or after parental leave.

For severance and retirement allowance the hourly average is converted into a monthly one. When a client plans to end an employment, we work out in advance which average will apply to the employee in that quarter, because moving the date a few days into the next quarter can shift the result up or down.

What to watch out for

A large one-off bonus in a quarter lifts the average and the cost of compensations in the next period. Bonus planning should take that effect into account in advance.

Errors also arise when the average is keyed into the payroll system by hand and not recalculated at the start of the quarter. Compensations are then paid on the old figure, the labour inspectorate or the departing employee spots the difference, and the top-up has to be settled retrospectively over several months, contributions included.