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Calculation of average wages

  • Average wages are calculated on the basis of wages which have become collectible and which have been earned in the six calendar months preceding the m
  • If the employee has not worked for more than 12 months, their average wage is calculated on the basis of the indexed wage in the employment contract.
  • When paying holiday pay, the average wage is not calculated if the employee was paid a fixed wage during the previous six months.

When is it necessary to calculate the average wage?

Regulation No. 91 of the Government of the Republic of 11 June 2009 establishing the conditions and procedure for payment of average wages, hereinafter (the Regulation) applies to the calculation and payment of the average wages of employees in the cases prescribed by law.

Average working day wage is calculated and paid in the cases prescribed by the Employment Contracts Act (hereinafter Employment Contracts Act):

  • during training (clause 28 (2) 5) of the Employment Contracts Act);
  • upon failure to provide work (section 35 of the Employment Contracts Act);
  • in the event of an impediment to work (section 38 of the Employment Contracts Act);
  • upon payment of redundancy pay (subsections 100 (1) and (3) of the Employment Contracts Act);
  • in the event of a material breach of contract by the employer (subsection 100 (4));
  • in the event of insufficient advance notice of cancellation (subsection 100 (5));
  • upon unlawful cancellation of employment (subsections 109 (1) and (2) of the Employment Contracts Act).

On 2 January 2018, an employer presented an employee with a declaration of cancellation in order to dismiss the employee. The employee had 11 years of service, so the employer had to give 90 calendar days’ notice. The employee’s employment ended on February 1, meaning that the employer only gave the employee 30 calendar days’ notice. If the employer had given 90 calendar days’ notice, the employment relationship would have ended on 1 April. The employee’s payday is on the 5th day of the month and their wage is 700 euros per month. How much redundancy pay is the employee entitled to? How much compensation does the employer have to pay for insufficient advance notice?

  • The period 2 February to 1 April would have included 40 calendrical working days (excluding public holidays and weekends), for which the employer must pay compensation to the employee at a rate equal to the employee’s average working day wage (subsection 100 (5) of the Employment Contracts Act);
  • the need for the calculation arose in the month of February. With the final settlement, the wage for January also became collectible, thus the period August 2017 to January 2018 will be considered as the six-month period (subsection 2 (2) of the Regulation);
  • average working day wage: 6 x 700 = 4,200/129 (calendrical working days) = 32.56 euros (subsection 3 (1) of the Regulation);
  • compensation for insufficient number of working days of advance notice: 40 x 32.56 = 1,302.40 euros (subsection 100 (5) of the Employment Contracts Act);
  • average number of calendrical working days: 129 / 6 = 21.5 (necessary for calculation of the average monthly wage, subsection 3 (6) of the Regulation);
  • redundancy pay: 32.56 x 21.5 = 700.04 euros (subsection 3 (6) of the Regulation)

Average calendar day wage is calculated and paid in the cases provided for in the Employment Contracts Act:

  • for annual holiday (subsection 70 (1) of the Employment Contracts Act);
  • for study leave (subsection 13 (3) of the Adult Education Act, subsection 70 (1) of the Employment Contracts Act);
  • for compensation for unused holiday (§ 71 of the Employment Contracts Act);
  • for sickness benefit for days 4 to 8 of certified incapacity for work (subsection 12 2 (1) of the Occupational Health and Safety Act).

An employee went on childcare leave in August 2016 and now wishes to terminate the childcare leave and take 28 days of annual holiday from 15 October 2018. The employee’s wage under the employment contract was 750 euros in 2016, which is not higher than the national average gross monthly wage in the last quarter according to Statistics Estonia, and the employee’s employment relationship is not regulated by a collective agreement. How to calculate the employee’s holiday pay? What is the index?

  • To calculate the index, the statutory minimum wage in 2018 (€500) should be divided by the statutory minimum wage in 2016 (€430), which yields 1.16 (subsection 2 (5) of the Regulation);
  • then the wage of €750 paid in 2016 should be multiplied by the index of 1.16, which yields €870. This is the employee’s average wage at the time the holiday pay is calculated (subsection 2 (5) of the Regulation);
  • since the need to calculate the holiday pay arose in October, the result (€870) must be divided by the number of calendar days in that month of October (31): this yields the average calendar day wage, which in this case is €28.06 (subsection 4 (4) of the Regulation);
  • as the employee will be on holiday for 28 calendar days, the average calendar day wage must be multiplied by 28. The employee in the example will receive a total holiday pay of (28 * 28.06 =) €785,68.

In the cases listed above, the employer must calculate the average wage. Only when calculating the remuneration of annual leave does the regulation provides for the so-called maintenance of wages and this is the case if the employee has been paid a fixed wage during the previous six calendar months. Remuneration is unchanged even if the employee’s remuneration has not changed, but he or she has received, for example, sickness benefit or holiday pay within six months. If the remuneration has been variable, the average must also be calculated when calculating the remuneration of annual leave.

The employee worked full time in 2020 and his wage was 2,000 euros. From January 2021, the employee started working part time, 20 hours a week and with a wage of 1,000 euros. If an employee takes annual leave in January 2021, how is his or her holiday pay calculated?

If the employee has received the same wages in the six calendar months preceding the month in which the need for calculation arises and the employee’s wages change from the calendar month in which the employee goes on holiday, the average wages is not calculated and the employee is paid a fixed wage. In the case of holiday pay, the employee’s wages in previous months must be considered, not the wages that the employee would have received if he had worked instead of taking a holiday. For the period of leave, the employer pays the worker holiday pay based on the previous wages, and for the rest of the days, wages according to the new agreement.

General principles for calculating average wages

The average wage is calculated from the wages earned in the six calendar months preceding the month in which the need for calculation arose, which has become collectible (subsection 2 (2) of the Regulation). It is important to clarify some important nuances here.

The month in which the need for calculating average wages arose is the month when the event that caused the need for the calculation started. For example, when calculating holiday pay (any holiday), the month when the need for calculation arises is the month to which the penultimate working day before the start of the holiday falls (subsection 2 (2) of the Regulation). This is regardless of whether the holiday pay is paid before the holiday or on the payday. When calculating sickness benefit, the month in which the need for calculation arises is the month in which the first day of sick leave falls. In all other cases, the month in which the need for calculation arises is either the payday or the time of the end of the employment contract (payment of the final settlement).

It is important to point out that remuneration is any remuneration paid for work (including additional remuneration, performance pay, etc.). Holiday pay and benefits (e.g. daily allowance, on-call time pay, sickness benefit, etc.) are not included in the average wages. The calculation of average wages takes into account wages that have been earned and become collectible, i.e. for example, if performance pay is paid nine months after the results, even if the performance pay is paid within six months, since it was earned before six months, it will not be included in the calculation of average wages. Wages become collectible on the payday or at the end of the employment contract. It is also not necessary to recalculate the average wage if, after calculating and paying the average wage,  additional remuneration is paid for the period to be taken into account (e.g. the employee is paid a premium for the previous year’s results).

 

Calculation of average wages in the case of payment of additional remuneration

Wages include additional remuneration, bonuses, etc., if the bonuses are related to an employee’s performance at work and are paid to the employee for performing the work. 

Average wages are calculated based on the accrual method, that is, the calculation is based on the wages earned by an employee. Therefore, in the case of payment of additional remuneration, the time for which the additional remuneration was earned, not paid, shall be taken into account.

If an employee received a bonus for his or her performance during the whole year, it shall be divided proportionally over the months of the year to calculate average wages. In other words, when calculating average wages, the monthly value equals 1/12 of the annualbonus, however, this bonus must also have been paid (i.e., become collectible) by the time the average wages are calculated.

The current law does not oblige an employer to make recalculations (subsection 2(1) of the Regulation). For example, if the average wages of an employee need to be calculated and paid in November of a calendar year and he or she receives additional remuneration / annual bonus for the calendar year at the end of December or in January of the following year, the wages that were paid to the employee earlier do not have to be recalculated.

Specific cases for calculating average wages

  • If the need to calculate the average wage arises before the first pay day, the average wage is calculated according to the wages valid in the employment contract.
  • If the employee has worked for less than six months and has received the first wage, the average wage is calculated for the months worked in which the employee has earned wages.
  • If the employee has not worked for 6-12 months (e.g. due to illness), the average wage is calculated according to the wages valid in the employment contract.
  • If the employee has not worked for more than 12 months, the average wage is calculated on the basis of the indexed wage in the employment contract

Index = the minimum wage of the month which the need to calculate the average wage arose divided by the minimum wage for the month of refusal to work.

Indexation does not apply if in the month when the need to calculate the average wage arises:

  • the remuneration is agreed in the collective agreement. In this case, the remuneration agreed in the collective agreement shall be used, unless the remuneration agreed in the employment contract is higher than the remuneration agreed in the collective agreement in the month in which the need to calculate the average remuneration arises;
  • the current wage is higher than the national average gross monthly wage for the last quarter published by Statistics Estonia. In such a case, the wage to be used shall be that in force in the month in which the need to calculate the average wage arises.

Is it possible to agree that the average will not be taken into account and that the employee will r

Rule: If the staff employee was paid a fixed amount of remuneration in the preceding six calendar months, the average remuneration shall not be calculated for the purpose of the payment of the annual leave and the remuneration calculated on the basis of the fixed amount of remuneration shall be paid (subsection 1 (1¹) of the Regulation). This means that in the case of a fixed remuneration, remuneration maintenance must be applied when calculating the annual leave pay.

Option If the holiday pay, calculated on the basis of the average remuneration for the leave, is less than the remuneration which the employee would receive if he or she had performed his or her duties during the same period, the employee may be paid the agreed remuneration as holiday pay (subsection 4 (6) of the Regulation).

  • This provision applies only to the calculation of holiday pay for annual holiday.
  • In other cases (e.g., redundancy pay), wages may only be maintained in accordance with section 2 of the Employment Contracts Act (option derogating to the benefit of the employee).

Thus, only in a situation where the average wage would be lower than the agreed wages may an employer choose not to calculate the average wage and use an option that is more favourable to the employee – maintaining the wages – but the choice rests with the employer.

Annual holiday pay (subsection 70 1) of the Employment Contracts Act) and holiday pay (section 71 of

The annual holiday pay is calculated on the basis of the average calendar day pay. To calculate the average calendar day pay, wages for six (or less according to time worked) months are added and divided by the number of calendar days in the same period. The number of calendar days on which the calculation is based is reduced by the number of calendar days when the employee’s remuneration was not calculated for days absent from work on the basis of section 19 of the Employment Contracts Act (annual holiday, incapacity for work, etc.). National and public holidays shall not be included in the number of calendar days when calculating the annual holiday pay and holiday pay.

AVERAGE CALENDAR DAY PAY = Six months’ wages that have become collectible / six months’ calendar days – public holidays – calendar days absent from work on the basis of section 19 of the Employment Contracts Act

ANNUAL HOLIDAY PAY = average calendar day pay × number of days of annual holiday or number of days of annual holiday earned

Study leave pay (subsection 13 (3) of the Adult Education Act)

The annual holiday pay is calculated on the basis of the average calendar day pay. To calculate the average calendar day pay, wages for six (or less according to time worked) months are added and divided by the number of calendar days in the same period. The number of calendar days on which the calculation is based is reduced by the number of calendar days when the employee’s remuneration was not calculated for days absent from work on the basis of section 19 of the Employment Contracts Act (annual holiday, incapacity for work, etc.). When calculating the study leave pay, national and public holidays are included in the calculation of calendar days.

AVERAGE CALENDAR DAY PAY = six months’ wages that have become collectible / six months’ calendar days – calendar days absent from work on the basis of section 19 of the Employment Contracts Act

STUDY LEAVE PAY = average calendar day pay × number of days of study leave

Sickness benefit (section 12 2 of the Occupational Health and Safety Act)

Sickness benefit is calculated on the basis of the average calendar day wage. To calculate the average calendar day pay, wages for six (or less according to time worked) months are added and divided by the number of calendar days in the same period. The number of calendar days on which the calculation is based is reduced by the number of calendar days when the employee’s remuneration was not calculated for days absent from work on the basis of section 19 of the Employment Contracts Act (annual holiday, incapacity for work, etc.). When calculating sickness benefit, national and public holidays are included in the count of calendar days.

AVERAGE CALENDAR DAY PAY = six months’ wages that have become collectible / six months’ calendar days – calendar days absent from work on the basis of section 19 of the Employment Contracts Act

SICKNESS BENEFIT = average calendar day wage × number of days of certified incapacity for work compensated for by the employer × 0.7

Participation in training (section 28 of the Employment Contracts Act), failure to provide work (sec

Periods of participation in training (section 28 of the Employment Contracts Act), failure to provide work (section 35 of the Employment Contracts Act), or non-performance of work due to an impediment (section 38 of the Employment Contracts Act) must be remunerated for on the basis of the average calendrical working day wage or average hourly wage.

AVERAGE CALENDRICAL WORKING DAY WAGE = 6 months’ wages that have become collectible / 6 months’ calendrical working days - calendrical working days of absence from work on the basis of section 19 of the Employment Contracts Act (annual leave, incapacity for work, etc., including section 35 of the Employment Contracts Act)

AVERAGE HOURLY WAGE = average calendrical working day wage / calculated number of hours worked per day for the agreed upon working time (8 in the case of full-time employment)

  • REMUNERATION FOR PARTICIPATION IN TRAINING (section 28 of the Employment Contracts Act) = average calendrical working day wage or average hourly wage × number of days or hours of participation in training
  • REMUNERATION IN THE EVENT OF FAILURE TO PROVIDE WORK (section 35 of the Employment Contracts Act) = average calendrical working day wage or average hourly wage × number of days or hours of absence from work
  • REMUNERATION IN THE EVENT OF NON-PERFORMANCE OF WORK DUE TO A HINDRANCE (section 38 of the Employment Contracts Act) = average calendrical working day wage or average hourly wage × number of days or hours of absence from work

Redundancy pay (subsection 100 (1) of Employment Contracts Act), extraordinary (subsection 91 (2) of

Redundancy pay (subsection 100 (1) of the Employment Contracts Act) as well as compensation for extraordinary (subsection 91 (2) of Employment Contracts Act) cancellation of an employment contract (subsection 100 (4) of the Employment Contracts Act) or unlawful termination of an employment relationship (subsections 109 (1) and (2) of the Employment Contracts Act) are calculated on the basis of the average calendrical working day wage and the average monthly wage.

AVERAGE CALENDRICAL WORKING DAY WAGE = 6 months’ wages that have become collectible / 6 months’ calendrical working days - calendrical working days of absence from work on the basis of section 19 of the Employment Contracts Act (annual leave, incapacity for work, etc.)

AVERAGE MONTHLY WAGE = 6 months’ calendrical working days × average calendrical working day wage / 6

  • Redundancy pay (subsection 100 (1) of the Employment Contracts Act) = average monthly wage NB! Periods during which the employee was paid reduced wages on the basis of section 37 of the Employment Contracts Act are excluded from the calculation of the redundancy pay as well as of compensation for insufficient advance notice.
  • Compensation for extraordinary cancellation of employment contract (subsection 100 (4) of the Employment Contracts Act) = average monthly wage × 3. Compensation for unlawful termination of employment relationship (subsections 109 (1) and (2) of the Employment Contracts Act) = average monthly wage × 3 or 12

Insufficient advance notice of cancellation of employment contract (subsection 100 (5) of the Employ

Compensation for insufficient advance notice of the cancellation of an employment contract (subsection 100 (5) of the Employment Contracts Act) is calculated on the basis of the average calendrical working day wage multiplied by the number of calendrical working days (Mon–Fri) in the period of insufficient advance notice. The calendrical working days in such a period of insufficient advance notice are counted from the final date of validity of the employment relationship to the end of the statutory period for advance notice (subsection 97 (2) of the Employment Contracts Act).

NB! Periods during which the employee was paid reduced wages on the basis of section 37 of the Employment Contracts Act are excluded from the calculation of the redundancy pay as well as of compensation for insufficient advance notice.

AVERAGE CALENDRICAL WORKING DAY WAGE = 6 months’ wages that have become collectible / 6 months’ calendrical working days - calendrical working days of absence from work on the basis of section 19 of the Employment Contracts Act (annual leave, incapacity for work, etc.)

Compensation for insufficient advance notice of cancellation of employment contract (subsection 100 (5) of the Employment Contracts Act) = average calendrical working day wage × number of calendrical working days (Mon–Fri) in the period of insufficient advance notice