When we calculate statutory payments, there are often eligibility criteria that must be in place
- The individual must provide the required amount of notice (either before or after the absence) and
- The individual must be entitled to leave granted as an employment right, often with a continuous service rule, though this does not apply to Statutory Sick Pay where there is no statutory right to sick leave and no requirement for a period of continuous service
However, a common factor that a fundamental is the level of an individual’s Average Weekly Earnings (AWE). Simply, one of the criteria for all statutory payments is that AWE must be at or above the Lower Earnings Limit for National Insurance Contributions (NICs) in the ’relevant period’.
Payroll professionals and students commonly do not recognise three things, and these are essential when performing manual calculations or checking the calculation that payroll software has performed:
- What is included in AWE?
- What is the relevant period?
- What is the rounding rule?
To demystify this complicated area, ICB looks at each of these areas:
What is included in AWE?
For all statutory payments (sickness and family-related payments), Regulations prescribe that AWE are comprised of ‘any remuneration or profit derived from employment’. Simply, this means any earnings that are liable for Class 1 NICs and paid in the relevant period. This is even though the earnings paid may not relate to that period, for example, payment made for a backdated pay increase.
Of course, nothing is as simple as this and there are times when this does not apply. For example:
- If the earnings paid are incorrect and the resultant calculation would disadvantage either employee or employer, for example, overtime paid to the wrong employee
- For family-related payments (maternity, paternity etc), where the earnings are reduced because of the employee being on reduced pay because of furlough, the calculation should be based upon the pay that would have been received (the Normal Weekly Earnings)
- For family-related payments, where the earnings from employment are not equal to or above the LEL, the employer must look at any amount of earnings subject to Class 1B NICs, i.e., they would have been subject to Class 1, but the employer entered into a PAYE Settlement Agreement with HMRC
What is the relevant period?
This is where payroll professionals and students must understand payroll professionals and students must understand all the statutory payment terminology:
- For SSP, the AWE is calculated in the relevant period that is between the last normal payday before the start of the PIW and the last normal payday falling 8 weeks before that
- For SMP, the AWE is calculated in the relevant period that is between the last normal payday to fall in or before the QW and the last normal payday falling 8 weeks before that
- For SAP, the AWE is calculated in the relevant period that is between the last normal payday to fall in or before the MW and the last normal payday falling 8 weeks before that. Note that this is slightly different where the adoption is from abroad
- For SPP, the AWE is calculated in the relevant period that is between the last normal payday to fall or before the Saturday of the QW (birth) or MW (adoption) and the last normal payday falling 8 weeks before that
- For SPBP, the AWE is calculated in the relevant period that is between the last normal payday on or before the end of the week preceding the ‘Relevant Week’ and the last normal payday falling 8 weeks before that. The Relevant Week is the start of the week in which the employee was bereaved of a child
It is worth looking at HMRC’s Statutory Payments Manual from page SPM170300 onwards for examples of employees that are not paid weekly and, possibly, do not have a full 8-week period, for example, a new employee.
Of course, at SPM172200 there is guidance on backdated pay increases in maternity cases and SPM172100 talks of backdated pay increases in adoption, paternity and bereavement situations. It is no surprise that the rules are not the same!
The Rounding Rule
An important factor is the rounding rule. SPM170050 says that professionals (and software) should not apply any of the normal rounding rules when determining whether an employee’s AWE is sufficient in the relevant period.