Introduction

Gross earnings are used for calculating average weekly earnings, ordinary weekly pay using the ordinary weekly pay formula, average daily pay, 8% pay as you go annual holidays pay, pay for a customary annual closedown (in some situations) and the annual holidays component of final pay.

This tool will help you to include the correct components in your gross earnings calculations. The general principle to apply is that if a payment made by an employer to an employee is a payment they have to make under the employee's employment agreement then that is included in gross earnings. You should interpret ‘employment agreement’ widely to include all payments made by an employer to an employee under workplace policies, bonus scheme rules etc. Payments made by third parties to employees are not included in gross earnings.

There are some exceptions. For example, reimbursement payments made by an employer to an employee for costs incurred are not included in gross earning. Discretionary payments are not included in gross earnings but you should be very cautious before deciding that a payment is discretionary.

Definition of calculation period

The calculation period will depend on what you are calculating the employee's gross earnings for. For example, if the employee receives their holiday pay as part of their regular pay package on the basis of 8% of their gross earnings (as pay-as-you-go) - the calculation period will be the pay period. If you are working out average weekly earnings to calculate what to pay the employee for annual holidays they are entitled to and are taking, the calculation period for gross earnings will be the 12 months just before the end of the last pay period before the annual holiday.

There are two ways of deciding whether a payment falls within the calculation periood. You can use the payments that are actually made (or should have been made under the contract) within the period or you can use the relevant payments for the work done during the calculation period. Whichever one you choose, you should make the decision bearing in mind your obligations of good faith and be consistent each time you calculate gross earnings. For more information see our document Holidays Act 2003, Guidance on annual holidays, bereavement leave, alternative holidays, public holidays and sick leave.

Definition of contractual

If an employee has a 'contractual' entitlement to a benefit or payment this should be considered more broadly than just whether it is included in the written employment agreement. Bonus and incentive schemes are often documented in a separate document which the employee may or may not have signed or have access to. Some payments may be included in the organisations' policies or procedures, while others may not be documented at all but are an established part of the custom and practice of the organisation.

Discretionary payments’ have a special meaning under the Holidays Act 2003 and it is important to understand this to make sure your gross earnings calculations are done correctly and comply with the Act. A payment is not a discretionary payment if an employer is bound by the employee’s employment agreement to make a payment even if

• the amount of payment is not stated and may be determined by the employer or
• certain conditions must be met before a payment is made.

The Labour Inspectorate’s position

If an employer has a contractual obligation to apply a payment scheme then any payments made under the scheme are not discretionary payments within the meaning of the Holidays Act 2003.

• If the payment does have a contractual basis it is unlikely to be a discretionary payment even if the amount of payment that the employer decides to pay the employee could be zero ie no payment is made at all.
• If a document states that a payment is discretionary for the purposes of calculating gross earnings, this alone will not make the payment discretionary.

It is the real nature of the payment which is the deciding factor and whether the payment has a contractual basis in the employee’s employment agreement. A payment is only truly discretionary if there is no contractual basis to the payment.

When considering whether a payment has a contractual basis, ‘employment agreement’ must be read broadly to include all documents and agreements (whether in writing or verbal) that form part of the contractual relationship between the employer and employee. For example, these will include the offer of employment, the employment agreement, any additional agreed terms and conditions, remuneration statements, the rules of a commission or incentive scheme, company policies and (potentially) any agreement created by the conduct of the parties

If there is doubt, we recommend seeking legal advice to determine if a payment is truly discretionary.

Instructions:

Tick on any of the following boxes if the employee has been paid this item in the calculation period. You can enter ALL the amounts to get a total but this is optional.