Wednesday, May 13, 2015

How much workers’ compensation coverage do I have… really?

Take five minutes and consider this question:  “If I got hurt at work today and was off work (for a week or year), how much of my financial loss would be covered by workers’ compensation?”
No one expects to suffer a work-related injury or disease but chances are that everyone reading this column will miss time from work because of a work-related injury or illness at least once in their work careers. We expect that workers’ compensation will be there to cover our financial losses, but how much “compensation” will you really get?
In most US states (and the Yukon in Canada), “temporary disability” compensation rates are based on gross average earnings.  Check with your jurisdiction on what is included and excluded from the calculation of average earnings.  In most of Canada and some US states (Alaska, Connecticut, Iowa, Maine, Michigan) ,  Net  or “Spendable” earnings from employment are used.  Net earnings are usually calculated as Gross Earnings less mandatory deductions for social insurance, employment insurance and taxes but check with the jurisdiction to be clear on how the calculation works in your state or province.     In both Canada and the US workers’ compensation payments are tax free.
Step 1.  Calculate the base
  • My average Gross Earnings:
     ______Week  ______Year
    • Less: Mandatory deductions (Social Security or Canada Pension, Employment Insurance or Unemployment Insurance, Prov or State income tax, Federal Income Tax, etc. )
  • My NET or Spendable earnings:
    ______Week _______Year 
For fun, let’s consider a random skilled worker like a telecommunication line installer (occ code 49-09052) in a random state, say, Delaware, as an example.  The occupation clearly has risks and those that do the job have a lot to lose if an injury occurs.  Annual wage at the 75th percentile in May 2014 in the US was $71,230 ($81,160 at the 90th percentile) [BLS 2014].   Weekly take-home pay for a single status tax filer (result using above gross annual earnings to calculate a week of benefits for May 30 2014 payday for  Delaware Single filer in payroll calculator ) would be about $946 ($1062 at the 90th percentile) after typical deductions. 
For most of us, we expect workers’ compensation to protect that buying power of our earnings.  Net or Spendable earnings are what we use to pay the mortgage, put food on the table, and support our families.  It is this amount –or something close to it – that we want and expect workers’ compensation to cover.  But there’s a catch!
Most jurisdictions have limits on the earnings that can be insured or the amount of the compensation you can receive on a temporary disability claim.  For example, a workers’ earnings above  $998.35 per week in Delaware, are above the maximum  insured by workers’ compensation and are effectively uninsured [Delaware 2014].   In Canada, most provinces (except Manitoba) have a maximum amount that can be insured ($52,100 in Prince Edward Island, $95,300 in Alberta).  A low maximum benefit or a low maximum insured amount can limit the amount of compensation you will receive.    Check your jurisdiction’s limits.    
Step 2:  Apply restrictions on maximum insurable.
  • Insured gross earnings:
     _______Week  ______Year
 The effect of the maximum in Delaware for our line repairer will reduce the weekly gross from $1369.81 (or $1560.77 at the 90th)  to $998.35 insured gross earnings.

But there’s another possible catch!   What you actually get from workers’ compensation is reduced by application of the “compensation rate”.  Compensation rates in most Canadian provinces are 85-90% of Net earnings; compensation rates in the US are typically 66.67% of Gross.  There are exceptions in both countries.  For example, Massachusetts compensates at 60% of Gross, Maine at 80% of Spendable;  Yukon pays 75% of Gross, Nova Scotia pays 75% of Net for the first 26 weeks and 85% of Net thereafter.  Again, check your state or provincial workers’ compensation authority to confirm the compensation rate. 
Step 3.   Calculate the temporary disability compensation
  • Workers’ compensation rate in my province or state
    _________ % of   Gross   or  _____% Net
    • Multiply rate times appropriate line from Step 1 (or Step 2 if reduced by the maximum).
    • Check jurisdiction for maximum weekly or yearly compensation payment amounts and reduce to that level if necessary
  • Potential temporary disability compensation:  
    _______Week  ______Year  
Using the Delaware line installer and applying Delaware’s compensation rate of 66.67%, the potential weekly compensation for temporary disability will be $665.57. That represents about 48% of gross (42% of gross at the 90th percentile earnings level).   In Kansas, a similar worker would be limited by the weekly maximum benefit in that state of $594. 
But there’s yet another catch!  All US states and a couple of Canadian provinces (New Brunswick, Nova Scotia and PEI) have waiting periods.  These are essentially worker “deductibles”.  Workers get no temporary disability compensation for the first days to a week of time off work due to a work-related injury (3 days in California, 7 days in Nebraska for example).  In most states, there is a “retroactive” period that will allow compensation for the waiting period to be paid if the duration of disability is longer than (typically) one to four weeks (6 weeks in Louisiana)….Unless you work in Hawaii or Rhode Island.  In those states, there is no retroactive period so the waiting period is essentially a pure self-insured deductible and never compensated. 
Step 4: Reduce Compensation by effects of waiting period and retroactive period on the expected duration of disability.
  • Waiting period : ________ 
    Retroactive Period: ______
  • Actual temporary disability compensation:
    _______Week  _______Year
For our Delaware line repairer,  a week off work will result in 3 days with no income from worker’s compensation but a period of longer than a week will see the waiting period paid retroactively.  A similar worker in Rhode Island would likely get no temporary compensation for a week of disability and only 51 weeks of compensation for a 52 week stretch of temporary disability.   
The point of doing this calculation for yourself in your workers’ compensation jurisdiction is simply this:  you may find that the financial losses for a work-related disability of a week, a couple of months or year are much larger than the workers’ compensation you might have expected to receive.  The presence of a maximum insurable, maximum weekly compensation, low compensation rate, long waiting period with long or non-existent retroactive period may leave you and your family exposed to significant financial losses you are unprepared to bear.
If you figure you can bear a loss of 10 or 15% in net spendable income and that you get that result   from following the above steps then great!  You live in a jurisdiction that is providing relatively good temporary disability compensation.   If your expected loss is greater than your risk tolerance then you need to do some more investigation.
One thing you won’t be able to do is sue for any shortfall.  With very few exceptions, workers’ compensation is the “exclusive remedy”.  The workers’ right to sue was part of what was bargained away, part of the compromise that is the foundation of workers’ compensation;   in exchange, workers’ were to receive no-fault compensation.  One has to wonder at the moral and legal limits of that trade-off (at what point does the justification for the exclusive remedy break down?  When benefits fall below 60% of spendable? 50? 10?)
Leaving aside the question of justice (what the “Grand Bargain” or “Historic Compromise” was intended to provide), if you are in a state or province that leaves you with greater exposure than you expected or are willing to bear, you need to consider doing something about it.  In very practical terms, you need to quantify how much of the exposure you are willing to carry on your own (or impose on your family).  You may want to review your personal disability insurance coverage, the existence of optional group disability plans that may cover potential losses, and other possible means of coverage that will not impact workers’ compensation entitlements (and vice versa).
The good news is some of you will do this calculation and be reassured by the result.  Some workers’ compensation systems are covering temporary disability at 90% of Net earnings to the 90th percentile  of earners.  And they are doing that at a competitive price to employers.  Until and unless other jurisdictions reach that “90 for 90” standard, every wage earner needs to know this:  How much workers’ compensation coverage do I have… really?  

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