Friday, October 30, 2009

Workers' Compensation and a Uniform or Flat Assessment Rate?

I received a call last week about funding workers’ compensation systems. The caller asked why we don’t just charge one rate for all industries. For those of us in North America or Australia, this notion may seem odd since our systems all have different rates for different industries based on some sort of classification system. On the other hand, those covered by Canada Pension Plan-Disability or Social Security Disability Insurance in the US are familiar with the idea of a single contribution rate paid for an insurance. For workers without workers’ compensation coverage, CPP-D or SSDI may be the only insurance they have for work-related injury that precludes them from earning. Is there any good reason for having assessment rates that varies by industry? Are there any advantages to having a single rate system?

First, let’s talk about the rating systems we have. In BC, the average WorkSafeBC assessment rate (premium) is $1.56 per $100 of assessable payroll. Industries with higher costs pay more: Heavy construction, steep slope roofing, steel frame erection are at the high end, around $12 while financial institutions, computer software design and production pay between $0.08 and $0.13 per $100. Having a rate structure has implications. There are costs for creating and monitoring the classification system, assigning firms to various classification units and managing the inevitable conflicts that can occur as a business changes or argues that it should be classified in a (usually lower) classification.

A single rate system, on the other hand, requires none of these costs. Canada Pension Plan contributions are calculated as a simple tax on payroll (currently the employer and the worker each pay 4.95% of earnings for CPP). That’s it. Simple. But is it fair? In one sense, it is equal treatment for all and for non-work related causes of severe and prolonged disability, it likely is fair. Each of us bears a risk for serious disease that could debilitate us from work so it makes sense that all should share equally in the cost.

Doing the same for a workers’ compensation scheme has been proposed. Sir Owen Woodhouse proposed a flat rate for employers for their part of the New Zealand Accident Compensation scheme back in 1967. In defense of Woodhouse, his concept extended well beyond work-related injuries and in the context of a no-fault universal scheme of social insurance, the uniform rate idea is attractive.

I am unaware of any system in Canada, the US or Australia that have implemented a flat rate system. In Canada, the issue of a uniform assessment rate was considered by Sir William Meredith who writes:

It is the purpose of my draft bill to empower the Board in determining the roportions of the contributions to be made to the accident fund by employers to have regard to the hazard of each industry, and to fix the proportions of the assessments to be borne by the employer accordingly, and not to require that the proportions for each class or sub-class should be uniform…

So, in practice, workers’ compensation systems use classification systems that result in different rates being assessed for different industries according to ‘hazard’ which includes the human and financial costs associated with the wage structure, frequency and severity of injuries that occur within an industry. A uniform rate, it may be argued, would be tantamount to a subsidy. In the BC example noted above, a uniform assessment of $1.56 would be very attractive to steep slope roofers and would be a significant cost burden to financial institutions whose assessments would be used to offset the costs in sectors where injuries were more frequent and/or costly.

Similar arguments apply within sectors and are often used as a justification of experience rating or rate modification…but that is a discussion for another day.

1 comment:

Anonymous said...

A disclaimer: I work with Terry at WorkSafeBC... thus, you can take my comments with a grain of salt.

However, I would add a comment to his points concerning why jurisdictions in Canada, the US and Australia have adopted classification/rating systems to charge employers premiums. A primary rationale for doing this is that the cost of producing a good or service consumed by the general public should include the costs of all the injuries, diseases and/or workplace deaths that the industry sustains to bring that service to the public.

Think about it this way: when you buy a loaf of bread, you are also paying the costs of insuring the workers of the baking industry who brought you that loaf of bread. As a result, industries that keep their collective costs down can lower their costs to consumers. It is for this simple reason that complex classification systems have been created for every jurisdiction in North America and Australia.