How much will I get while on workers’ compensation?

If you are injured in a work-related incident or suffer a work-related illness or disease, you are very likely entitled to workers’ compensation.  How much financial compensation you will actually receive while you are temporarily totally disabled from work depends on two main factors:

• Your average earnings prior to the injury or illness
• The jurisdiction accepting your claim

As noted in my previous posts, workers’ compensation benefits while you are off work may provide income far short of your usual take-home pay.  Both higher and lower earners may find the shortfall in income jeopardizes their own (and their family’s) financial security—a further burden on top of the physical and psychological impact of the injury itself.

Workers’ compensation for temporary total disability is calculated in one of two may ways in North America:

• As a percentage of Gross average earnings
• As a percentage of Net or Spendable average earnings

Although the Gross basis is still the most prevalent in the US, several states now provide workers’ compensation for temporary total disability as a percentage of Spendable earnings.  In Canada, all but one jurisdiction have adopted the Net basis to calculate workers’ compensation payments for temporary disability.   Let’s examine these two compensation methods and some of their variations.

Gross Average Earnings

In North America, jurisdictions using the Gross basis vary from a rate of 60% to 75% of average earnings to calculating workers’ compensation.  The most common compensation rate in the US is “two -thirds” (66.67%) of gross earnings.  As shown in my previous two posts, this method leads to lower wage earners receiving far less spendable wage replacement than higher wage earners.  The following table demonstrates how weekly compensation amounts vary with income and the percentage of Gross average earnings applied:

As noted, the most common compensation rate used in the US is “two-thirds” [66.7%] of Gross average earnings.   This table is not specific to a particular state or province but examples of jurisdictions that use the compensation rates (60% to 75%) noted.  Caution:  actual compensation in any state may be limited by statutory maximum insurable average earnings or maximum weekly benefit provisions.

The inequity of the “two-thirds” of average earnings compensation rate was highlighted in the National Commission on State Workmen’s Compensation Laws (1972) report. The Commission, chaired by John F. Burton, Jr., noted that gross pay results in inequities—uneven results for workers due to tax factors and number of dependents, concluding 

“...spendable earnings would better reflect the workers’ pre-injury circumstances.”

The National Commission did not prescribe an exact formula or methodology to achieve its recommendation of a compensation rate of at least 80% of spendable average weekly earnings.  Policy makers and legislatures in at least a few North American jurisdictions have implemented rules to overcome the inherent inequities in “two-thirds” standard common to most US states.  For example, Washington state varies the percentage of its compensation rate depending on family compositions.  Under this system, a single earner receives just 60% of their Gross average weekly earnings while a worker with a spouse would qualify for 65%.  The amount increases by 2% with each dependent child to a maximum of 75%.  This method does achieve the National Commission recommendation in some specific earnings and dependent combinations. 

Although all Canadian systems once used Gross average weekly earnings as the basis for calculating workers’ compensation, only the Yukon retains a 75% of gross average earnings as its basis.

The advantages of the gross system relate to its simplicity.  It is pretty easy to calculate two-thirds of a value.  The main disadvantage is the “rough justice” nature of its application.  The method tends to overcompensate higher wage earners and under-compensate lower wage earners relative to their usual weekly take-home pay primarily because what you take home is ultimately mediated by deductions from your gross pay for income taxes, social security and unemployment insurance.  Aside from Washington states graduated scale of gross compensation percentages, no other state or province using the Gross method adjusts compensation rates for temporary total disability to reflect the impact of statutory deductions.

Net or Spendable Average Earnings

The main alternative to using gross average earnings as the base for calculating temporary total disability payments is to apply the compensation rate to Net average earnings, sometimes called “Spendable” average earnings . 

Only four states use a percentage of “spendable”  earnings.  Rhode Island, Alaska and Connecticut use 75% while Iowa uses 80% of spendable—the only state to explicitly match the minimum recommendation of the National Commission.  As noted above and  in earlier posts, the National Commission on State Workmen’s Compensation Laws (1972) recommended a compensation rate moving to at  least 80% of spendable earnings.  

The calculation can be complex and depends largely on the taxation rate, number of exemptions, and contribution or premium rates for social insurance and other mandatory deductions.  To simplify administration of this policy, most jurisdictions using Net or Spendable earnings use detailed tables or calculators to determine net earnings that will be subject to the compensation rate. 

Ever jurisdiction will be different because the interplay between federal and state taxation regimes will vary.  To illustrate the method, let’s look at Rhode Island.  The following table summarizes select categories of earnings and exemptions to derive Spendable earnings and then applies the compensation rate to those earnings: 

Note that “exemptions” are not “dependents” but are declared categories along with marital status that are typically used by employers to calculate tax withholding for payroll purposes.   Employees inform their employers by completing an Internal Revenue Services (IRS) Form W-4.

Rhode Island mandates a 75% of spendable compensation rate.  It also has a weekly benefit maximum of $1275 as of October 1, 2019.  The following table shows the net weekly amounts for selected income and exemption combinations shown in the table above:

Rhode Island offers a dependent amount of an additional $15 per week per dependent while the worker is temporarily totally disabled.  The additional benefit, however, is limited by the maximum weekly amount. 

As noted earlier, all but one Canadian jurisdiction has moved to Net average earnings as the basis for the calculation of workers’ compensation for temporary disability.  Net is essentially the same as Spendable from a calculation perspective.  Both share the basic formula of:

Net Average Earnings =  Gross Average Earnings – (Taxes + mandatory premiums for social insurances)

There are a variety of approaches to implementing workers’ compensation on the basis of net or spendable earnings because of the challenges in determining precise figures for deductions.  Most approaches rely on information provided by the employer.   Workers may choose to not inform their employer regarding possible tax exemptions (or simply fail to take advantage of provisions regarding tax withholding), preferring to receive a tax refund after tax filing.  Privacy concerns may be another reason for not wishing to disclose information. 

Most workers’ compensation insurers will depend directly on employer-provided payroll data for gross earnings and deduction levels.  WSIB (Workplace Safety and Insurance Board of Ontario), for example, requires employers to include tax deduction codes on the report of injury form.  These codes refer to Revenue Canada’s Payroll Deduction code tables (the current year table is available at https://www.canada.ca/en/revenue-agency/services/forms-publications/payroll/t4032-payroll-deductions-tables/t4032on/t4032on-january-general-information.html).  There is a common table for federal taxes and a separate one for each province’s taxes because each level of government has its own taxation authority and rules.  Workers complete a Federal TD-1 and a similar provincial form (TD-1 ONT in this example).  The total exemption figure on each form is then compared to the appropriate tables to get the Federal and Provincial tax “claim” codes.  Failing to complete these forms results in the employer having to withhold tax but the worker maintains the right to claim the same amounts on their yearly tax filings.  Those that complete the tax forms allow the employer to withhold less tax and increase Net income on each paycheque. 

For the purposes of this example, a typical married couple with one income earner declared to the employer would have a Federal Code 7 and Provincial Code 5 entry.  WSIB publishes an Excel based tool to allow for the calculation of Net average earnings for each year.  Applying the aforementioned codes to various gross income levels in the  WSIB 2019 Net Average Earnings Calculator (XLS)then applying Ontario’s 85% of Net rate results in the following:

WorkSafeBC, (the Workers’ Compensation Board of British Columbia) takes a simplified approach for claims up to 10 weeks duration.  It applies federal and provincial income tax amounts based on a presumed 1.5 times the personal exemption rate.  This results in a higher estimation of tax and therefore lower workers’ compensation amount for those who might qualify for greater exemptions (workers over the age of 65, those with disabled partners or dependents, for example).  The method also results in greater tax deductions and higher workers’ compensation payments for single workers.  A long-term rate is established after the 10 week frame and takes into account the individual tax circumstances.

WorkSafeBC publishes an annual table to show the details of the presumed deduction and the compensation payable on a weekly basis.  The following has been extracted from the WorkSafeBC 2019 Net Compensation Table for selected values up to the maximum weekly benefit payable:

Spendable and Net calculations are more cumbersome than gross but they provide greater equity across income levels, at least up to a maximum.  Elimination of the maximum insurable or maximum weekly compensation amount would provide a standard expectation of income replacement at the compensation rate across all income levels—precisely what the National Commission recommended nearly half a century ago. 

Compensation on the basis of Net or Spendable as an additional complication.  Changes to income tax rules can increase compensation payments.  Both Canadian and the US federal governments have proposed or made middle-class tax cuts.  By exempting more income from taxation or lowering the percentage of income tax payable, the Net pay goes up—that’s the whole point!   The consequence, however, is an increase in actual compensation payable across all income ranges—something that may not be anticipated in premium rate setting. 

Concluding Comment

No system of compensation is perfect.  Very few states compensating on a percentage of Gross average earnings can claim to come close to the National Commission’s recommendation of at least 80% of spendable average earnings across all earning levels.  While the current Net and Spendable jurisdictions come closest to meeting the National Commission’s minimum recommendation, many of these also fall short of that threshold.  When coupled with policies on maximum insurable earnings and maximum weekly benefits (which limit the compensation payable), many workers will discover the inadequacy of their jurisdiction’s workers’ compensation temporary disability coverage only after a serious work-related injury.  Employers may also fail to realize their employees may have far less coverage than they expect. 

For very short-term periods of disability, a financial hit of ten, fifteen or twenty-five percent (or more) to spendable earnings might be bearable but for injuries resulting in longer duration, even the National Commission’s minimum standard will result in the loss of a week’s take-home pay every five weeks of disability and about a month’s less spendable income after five months off work.  Workers, employers, and policy makers need to understand how large a gulf in spendable income an injury creates.  

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 paychekcity.com 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?  

Does compliance with the National Commission's Temporary Disability Compensation Recommendations matter?

In the last three posts to this blog I have recapped the National Commission on State Workmen’s Compensation Laws (1972) recommendations regarding short-term work-related disability (Temporary Total Disability).  The National Commission under its Chairman, John F. Burton, Jr. recommended compensation with a waiting period of not more than three days with a retroactive period of not more than 14 days, a compensation rate moving to at  least 80% of spendable earnings , and a maximum compensation amount equal to twice the state average weekly wage. 

The last three posts examine the progress towards meeting these recommendations.   Although the National Commission only examined US state laws, its recommendations are referenced internationally in the development of jurisdictional workers’ compensation provisions and the National Commission report remains the one document to make specific minimum recommendations for the equitable sharing of losses between workers and employers due to work-related injury and disease in the US.  The National Commission’s recommendations set the minimum standard for that distribution.  Sadly, only one US state and seven Canadian provinces come close to meeting the all of the provisions noted above.  The accompanying table combines the ratings against the National Commission's recommendations.  Jurisdictions with high compliance (assessed as meeting at least two of the recommendations) are highlighted in yellow; low-compliance states (assessed as meeting one or none of the recommendations) are not highlighted. 

While Iowa was the only US state to meet all the recommendations assessed in this comparison, it should be noted that another 10 came close, meeting or exceeding the recommendations of at least two of the assessed categories (high compliance, for the purposes of this discussion). 

Why does compliance with the National Commission recommendations matter?  Increasingly I am asked to compare the provisions of various workers’ compensation systems.  Sometimes this is part of a policy review but many contracts and trade agreements now stipulate the equivalency of protections for workers.   I can confidently say that workers in most Canadian provinces and Iowa have equivalent protection for work-related losses associated with temporary disability.  I can also say with confidence that workers in an additional 10 states and the remaining provinces have temporary disability compensation protections that meet at least two of the key National Commission recommendations on TD coverage.

I am also asked to compare specific jurisdictions and to comment on the comparisons done by others.  Compliance with the National Commission recommendations is a useful contextual lens in which to view comparisons.  For example, WCRI’s well known CompScope™ product is often used as a comparative and benchmarking tool.  Take the following table, for example. 

Now note the same table highlighting states with high compliance to the National Commission recommendations. This perspective provides a new way of interpreting this table. 

One would expect that compliance with the National Commission's recommendations on temporary total disability compensation would translate into higher costs for the insurers and that these costs might also be reflected in higher premiums.  Similarly, the worker self-insured portion of losses not covered by workers’ compensation will be lower (waiting periods not reimbursed, spendable income losses not compensated, uninsured earnings above maximum compensation).  Unfortunately, there is no comprehensive ranking from the worker perspective.  From the employer perspective, however, there is the Oregon Workers’ Compensation Premium Rate Ranking study.  While this study is based on Oregon industrial mix and costs, highlighting the states with high compliance with the National Commission  TD recommendations provides new insights into the ranking. 

Suddenly, Iowa in the middle of the list stands out.  It complies with all the recommendations as assessed in this review. High-compliance states are clustered in the top half of the ranking.  Suddenly,  ranking for high-cost  / low compliance states (meeting only one or none of the recommendations) like California look much worse while the costs for high compliance states like Washington look less severe.   Oregon’s ranking as a high-compliance, low-cost state looks even better.  In a listing of high compliance states, it is well below others.  Even if you add back the costs paid by workers and employers into the Oregon Worker Benefit Fund, Oregon is still the lowest of the high compliant states. 

Now, there may be lots of other reasons why some low compliance states have high costs.  They may pay much more for administration, provide larger payments for permanent disability, or have much higher medical and legal costs, for example.  Those comparisons are not possible with the data I have but would be clearly worthwhile. 

What this assessment does say is that the horizontal equity objective of the National Commission’s temporary disability recommendations has not been achieved.  Workers with work-related total temporary disability in 80% of US states are not getting the minimum temporary disability compensation coverage recommended by the National Commission.   Workers in low-compliance states are bearing a much greater share of the cost of work-related injury than those in high-compliance states.

Forty years on, the National Commission’s conclusion sadly remains little changed: 

… We also agree that the protection furnished by workmen's compensation to American workers presently is, in general, inadequate and inequitable. Significant improvements in workmen's compensation are necessary if the program is to fulfill its potential.

States and provinces in high compliance with the National Commission recommendations have proven that a more equitable sharing of the costs of work-related injury, illness and disease is possible.  Let's hope by the fiftieth anniversary of the National Commission report, all jurisdictions will achieve full compliance with its temporary disability recommendations.
 

What percentage of earnings should be replaced by temporary disability benefits?

Workers’ compensation levels for temporary disability are of critical importance to workers and their families.  Any discussions I’ve read recently are around “benefit adequacy” of temporary disability benefits.  This is, of course, critically important but misses some important points.

Workers’ suffer from work-related injuries.  No one can share the physical and psychological pain.  Workers’ compensation is intended to offset the financial impact in terms of lost wages.  In addition to the pain and suffering of the work-related injury, workers must also bear the earnings lost that are not compensated by workers’ compensation temporary disability payments.  As with uncompensated waiting periods and earnings above the maximum insurable, workers are self-insured for the difference between what they lose in wages and what they get in compensation.

The obvious benefit adequacy argument characterizes the loss as a worker deductible.  It also shifts the cost of work-related injury from employer to worker.  The lower the cost to the employer, the less the incentive to invest in worker safety and return-to-work initiatives.  Workers’ compensation costs are part of the prevention feedback mechanism.  The historic trade-off that made workers’ compensation the exclusive remedy envisioned that costs of workplace injury would not unduly shift costs as well as the burden of injury upon the worker.  

How much of the worker’s loss should be compensated?  The National Commission on State Workmen’s Compensation Laws (July 1972) said the following:

We recommend that cash benefits for temporary total disability be at least two-thirds of the worker's gross weekly wage. The two-thirds formulation should be used only on a transitional basis until the State adopts a provision making payments at least 80 percent of the worker's spendable weekly earnings. (See R3.6 and R3.7)  [Emphasis added]

Here we are more than four decades after Professor Burton’s authoritative and comprehensive report and the fact is only 10 US state have made progress toward meeting this recommendation.  By contrast, all Canadian jurisdictions could be assessed as having met the recommendation with the majority exceeding the “at least 80% of net” standard set out in the report’s recommendation. [see accompanying table]

Beyond the benefit-adequacy argument, the financial costs of work-related injury being borne by workers are real and measurable cost.  Workers and their families bear other costs and there can be debates about what estimates of those ought to include.  Temporary Disability losses are easily quantifiable into the portion covered by workers’ compensation insurance and the portion self-insured by the workers themselves.  

If the work at least 80% of that loss.  Clearly a handful of US states and most Canadian jurisdictions have found ways to meet this standard.  Doing so may be fundamental to preserving workers’ compensation as the essential social insurance program it has become in the world today.