APPLYING THE SALARY INCREASE COEFFICIENT WHEN CALCULATING AN AVERAGE SALARY: THEORY AND PRACTICE.

November, 2017

A large number of companies increase employees’ salaries at least once a year, but what not everyone realizes is that, following such increases, an employee’s holiday pay must be recalculated and that this entails the application of an adjustment factor to the employee’s earnings.  But this task is even more complicated if an employee experienced several promotions during the calculation period, especially if such changes were accompanied by a change in the person’s position.

In this article, we shall explore the question of the application of a salary increase coefficient, taking this from theory to practice.  Below is a table, in which we have tried to outline the basic principles of using the salary increase coefficient.

Table 1. Use of the salary increase coefficient

Where is this stipulated and by what is it regulated? Article 10 of Order no. 100 on calculating the average wage, approved by the Cabinet of Ministers of Ukraine, dated February 8, 1995.
Who uses such calculations? Companies, institutions and organizations of all forms of ownership
For which calculations is this used?

 

 

Payments for annual, additional, study leave, compensation for unused vacation, savings of the average wage in the case of performance of state and public duties, donations, payment during business trip according to the average wage, material assistance in the amount of average monthly wages, and severance pay.
In which cases is it used?

 

This is applied in the case of an increase in tariff rates and salaries at an institution or organization, in accordance with legislative acts and also decisions provided for in collective agreements for both the billing period and the period during which the worker retains the average earnings and wages, including bonuses and other payments that are taken into account when calculating the average wage, for the period of time before the wage increase, adjusted for the salary increase coefficient.  When the tariff rates and salaries increased in the period during which the worker retains his average earnings, according to which income is accrued only in respect of the days for which the average wage was retained since the date that the tariff rates (salaries) increased.
The calculation algorithm and the utilization of the salary increase coefficient

 

The coefficient is determined by dividing the wage (salary) assigned to the artist following his pay raise, to his wage (salary) prior to getting a raise.  These factors are calculated for each employee separately for each occasion he receives a pay raise.  The calculated coefficient (or more factors, if the employee’s salary has been increased several times) should then be multiplied by the amount of accrued income for the period before the pay raise (such income includes any bonuses, the amount of wage indexation, holiday pay accrued during the previous vacation, and sick leave).
Are there any exceptions regarding the utilization of the salary increase coefficient? In the case that salary increments are related to being promoted to a higher-paid position, the increase coefficient should not be applied (Paragraph 3 of Article 10 of Order 100, Ministry of Labor letter no. 260/13 / 84-06, dated April 4, 2006).
Is it possible to avoid the use of the salary increase coefficient?

 

The provisions of Ministry of Social Policy Letter no. 696/13 / 84-08, dated October 24, 2008, stipulates the possibility of self-supporting enterprise in severe financial status to somewhat reduce the adjustment factor, but does not exempt these businesses from making such adjustments.  However, as discussed later in this letter, a reduction in the adjustment factor for the average wage is formalized through a company order.  Such an order should be issued prior to the period to which the coefficient is applied.  Furthermore, according to Article 97 of the Labor Code, all matters relating to wages (forms, systems, labor standards, pricing, salary schemes, conditions of administration, the size of bonuses, additional payments, bonuses and other incentives, compensation and guarantee payments) must be agreed upon with the employee representatives, especially when it comes to the deterioration of the conditions guaranteed by law.  Therefore, the above-mentioned orders should be based on a meeting of the labor collective, which should be made public, including the reasons for which the rate is being reduced (e.g. reduction / slight amount of work, financial problems in the company, etc.).
What liability does one face for not applying the salary increase coefficient? The failure to apply the adjustment factors may result in an underestimation of the amount of vacation pay owed to the employee for the period he has worked.  In the case of such a violation, the perpetrator shall be subject to a financial penalty in an amount that his three times the minimum wage established by law at the time that the violations were detected (Article 265 of the Labor Code) and an administrative penalty ranging from UAH 510 to 1700 will also be imposed (Article 41 of the Code on Administrative Offenses).

Examples of the calculation and use of the adjustment factors

1.M.Y. Petrenko was hired as a manager on October 10, 2016 with an annual salary of UAH 10,000. This employee took vacation from October 11, 2017 to November 15, 2017. The calculation period for calculating the average wage for his vacation pay was November 2016 to October 2017.  During this period, the employee had several salary increases, namely as follows:

  • As of December 1, 2016, his salary was UAH 12,500.
  • As of May 1, 2017, his salary was UAH 13,911.

For calculation purposes, the following factors will be applied, in accordance with the order of 100, to all income included in the calculation of the employee’s average income:

  • For income for November 2016, the factor is 1.3911 (13,911/ 10,000)
  • For income for the period December 2016 to April 2017, the factor is 1.11288 (13,911/ 12,500)

2.A.N. Pavlenko was hired as a senior administrator on May 12, 2016 with a salary of UAH 8500. He took vacation from November 1, 2017 to November 14, 2017.  The calculation period for calculating the average for the vacation pay was November 2016 to October 2017.  During this period, this employee received several raises, namely as follows:

  • As of December 1, 2016, his salary was UAH 10,000.
  • As of March 1, 2017, his salary was UAH 11,500.
  • As of May 1, 2017, the employee was promoted to the position of senior administrator with a salary of UAH 13,000.

For calculation purposes, the following factors will be applied, in accordance with the order of 100, to all income included in the calculation of the employee’s average income:

  • For income for November 2016, the factor is 1.35294117647 (11500/ 8500)
  • For income for the period December 2016 to February 2017, the factor is 1.15 (11,500/ 10,000)
  • For income for the period March 2017 to April 2017, the coefficient does not apply because on May 1, the employee was transferred to a higher paying position

3.Let’s supplement the conditions of example 2. On July 1, 2017, senior administrator A.N. Pavlenko’s salary was increased to UAH 14,300.

For calculation purposes, the following factors will be applied, in accordance with the order of 100, to all income included in the calculation of the employee’s average income:

  • For income for November 2016, the factor is 1.35294117647 (11500/ 8500)
  • For income for the period December 2016 to February 2017, the factor is 1.15 (11,500/ 10,000)
  • For income for the period March 2017 to April 2017, the coefficient does not apply because on May 1, the employee was transferred to a higher paying position
  • For income for the period May 2017 to June 2017, the factor is 1.10 (14,300/ 13,000)

According to the written explanations provided to us by experts from the Ministry of Social Policy in the form of an answer a written request, the salary increase coefficient should be calculated based on the position that the employee holds at the time of the salary increase.  Therefore, since the employee received a pay raise for his new position as senior administrator on July 1, 2017, the salary increase coefficient for the higher salary should be applied for the period from May 2017 to June 2017.

Thus, it is the employer’s duty, not just a right, to apply the salary increase coefficient.  Especially given the current realities with the intensification of audits regarding the observance of labor legislation, auditors will not only impose the above-mentioned penalties, but will also be obliged to eliminate the respective violation.  Therefore, we advise companies to take measures in advance to avoid the risk of facing the adverse effects of a factual audit by state labor authorities.

Authors: Tatiana Nevmerzhitskaya, Kateryna Pinkovskaya

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2017-12-04T07:47:29+00:00 04.12.17|Taxation and accounting|