Top Ten Priorities for Workers’ Compensation Benefit Reforms

 Workers’ compensation “reforms” are typically focused on reducing employer costs.  Enacted reforms often result in restrictions that limit rather than enhance benefits to workers. 

In the US, the National Commission on State Workmen’s Compensation (1972) [available at https://workerscompresources.com/national-commission-report/] laid bare the disparity then present across US jurisdictions and established recommendations for the minimum standards of what workers’ compensation should provide.  Sadly, even the minimum levels recommended by that report are often missing from current workers’ compensation statutes. 

Workers bear the cost of work-related injury

In a recent event to mark the 50^th anniversary of the National Commission, a US Department of Labor panel met to discuss the progress and the lack of progress in workers’ compensation reforms in the US.  [See https://youtu.be/fRAZJ2PosE0] Progress towards improving compensation for workers was noted; so were the many gaps and shortfalls in the present landscape of state workers’ compensation laws. 

US workers’ compensation benefits generally lag those provided under the Canadian provincial and Australian state workers’ compensation systems.  Workers have no choice but to bear the physical, psychological, and social costs of work-related injury illness and disease.  Policy makers have options in their policy choices to lessen the financial losses workers and their families must also bear.

RAND’s “Earnings Losses and Benefit Adequacy in California's Workers' Compensation System-Estimates for 2005–2017 Injury Dates” [see https://www.rand.org/pubs/research_reports/RRA964-1.html]   clearly show that occupationally injured workers suffer significant income losses over their non-injured counterparts despite workers’ compensation.  A similar methodology applied to Ontario by the Institute for Work and Health found about half of workers achieved earnings levels similar to their uninjured counterparts when taking post-injury earnings, Canada Pension Plan-Disability benefits, and workers’ compensation payments into account [see https://www.iwh.on.ca/summaries/issue-briefing/measuring-adequacy-of-workers-compensation-benefits-in-ontario-an-update ].

Top Ten Priorities for Workers’ Compensation Benefit Reform

Legislators and policy makers have options in any workers’ compensation reform package.  I have provided analysis for many of these options in this blog series and directly to policy makers in many jurisdictions.  Here are my top ten priorities.

 

1.  Make prevention the top priority

In the words of the National Commission, Workers’ compensation provides “a built-in stimulus to safety” and recommended insurers (including self-insurers and state-run insurance systems) sufficiently fund loss prevention and safety programs.  Prevention should be the number one priority.   The occupational injury, illness, disease, or death prevented is the single best benefit for worker and their families.

Based on media coverage, employer cost rather than worker safety and health dominate the discourse on workers’ compensation reforms.  Costs are important and reforms must be viewed through the lens of their impact on safety and health.  If base premiums or experience rating raise employer costs, there will be greater focus on loss prevention, safety, and health of workers. The converse is also true; if the cost of workers’ compensation fails to reflect the true financial cost of work-related injury, illness, disease and death, there is less of an incentive towards prevention. 

Note:  That’s not to dismiss the concept of effective cost control once a work-related injury occurs.  Effective claim management, active return-to-work measures, prudent reserve investments, effective audit, and other administrative functions are essential.  Waste and inefficiency in the administration of workers’ compensation systems can inflate costs in a way that damage both workers and employers.

The proportion of those financial losses covered by workers’ compensation covers varies across jurisdictions but generally fall well short of making up for workers’ financial losses incurred because of the work-related injury. Reforms that reduce that burden injured workers and their families also increase the safety stimulus workers’ compensation places on employers.

There are two mechanisms by which the net workers’ compensation costs employers pay may under-represent the cost of workers’ compensation: subsidies and cost shifting.  Subsidies may include return of premiums, dividends, distribution of surplus gains on reserves. Some jurisdictions have implemented controls to limit or prohibit subsidies being distributed to employers with poor safety records or workplace fatalities—not a bad idea to further underscore the prevention priority.

While subsidies are often quantified, cost shifting mechanisms are not.  The greatest cost shifting is externalization of the worker’s lost wages to the worker.   Injured workers and their families are forced to carry much of the loss from savings, family resources or community sources.  Some are allowed and even encouraged to use other entitlements or benefits such as group short-term disability or sick leave to make up for the shortfalls between regular earnings and workers’ compensation payments. 

Subsidies and cost shifts hide the true cost of work-related injury and the intended stimulus of workers’ compensation costs toward increased health and safety.

 

2.  Extend Who is covered by Workers’ Compensation

Workers’ compensation laws evolved by adding to mandatory coverage specific industries and sectors.  This left gaps and focused debate on each sector on a piece meal basis.  Some jurisdictions have opted for universal coverage laws:  Every industry and every worker is covered unless explicitly excluded.  This “everyone in” option is a fundamental public policy shift; exclusions are still allowed but force serious discussion of principles, criteria, and rationale.  Given the high percentage of jobs now covered by workers’ compensation in the US, Canada and Australia, opting for universal coverage makes sense.

Regardless of the legislative approach (universal with exceptions, or comprehensive sectoral listings) exclusions from coverage are still common.  Exclusions in some jurisdictions include

Agricultural workers

Certain family members

Domestic workers

Small companies with fewer than five workers

Gig workers

While some statutes allow for optional inclusion of such categories, such exclusions are a far cry from the goal of universal coverage.  The National Commission report stated workers’ compensation coverage “should be extended to as many workers as feasible”.  Universal coverage remains an illusive goal in many jurisdictions but should remain a high priority.

3.      

3. Extend What is covered by workers’ compensation

Mental injuries, certain cancers, and a variety of other diseases are known to be work-related on a population level but vastly under reported and compensated by workers’ compensation systems.  The question is not “which of these should be included in coverage” but rather “what policy changes are needed to ensure that more cases are accepted”. 

Covid-19 exposed serious gaps in workers’ compensation coverage of occupational disease.  In the absence of presumptive provisions, many front-line workers were not eligible for coverage from work-related disease.  Establishing presumptive provisions or temporary policy orders may have worked for this special case (some provisions are still being developed and applied while others have lapsed), but what about for other occupational diseases and future pandemics?  

The standard of proof and onus of proof in many systems is far too restrictive.  “Predominant cause” provisions are more common in the US now than fifty years ago.  Rather than “taking the worker as you find them” and considering the work-relatedness at a lower standard, both the higher standard of proof and shifting onus of proof discourage attribution of injury or disease to work.  Reforms here may involve re-establishing a lower test and shifting the onus away from the worker having the burden of proving work-relatedness.  Increasing presumptive provisions to ensure workers are covered when work is of causative significance in the development of injury, illness, disease, or death is a policy option we saw used in the COVID-19 crisis.  If the work-relatedness of any harm is not recognized, there will be little stimulus toward its prevention. 

 

4. Raise Maximum Insurable Earnings (Maximum Weekly Benefit)

For many jurisdictions, the maximum insured earnings or maximum weekly benefits payable effectively limit compensation.  For higher earners, the maximum limitation means take home or spendable income following injury may be cut in half or more.  Higher wage earners must effectively self-insure their losses above the maximum (or negotiate supplemental coverages that are not reflected in workers’ compensation data).  Loses may be catastrophic for families with costs externalized to the community as a result.

While many jurisdictions outside the US have increased insured earnings maximums, there is no standard formula or target established in most jurisdictions.  Setting a goal of covering the work earnings of at least 95% of employees in the jurisdiction would ensure almost all workers could continue to meet financial needs following work-related disability.

My October  2019 post explores this further  “Are wages or salary fully covered by workers’ compensation insurance?”

5.     

5.  Increase the Compensation Rate

The National Commission recommended a compensation rate “at least 80 percent of the worker's spendable weekly earnings.”  Note the “at least” portion of that recommendation.  While most US states have reached what the National Commission termed as “transitional basis” of two-thirds of gross, some have lower compensation rates (such as New Hampshire at 60% of gross). 

In Canada, most workers’ compensation jurisdictions compensate at 85-90% of net average earnings (Nova Scotia is an exception at 75% of net for first 26 weeks with a “step up” 85% thereafter).  On Canadian jurisdiction (Yukon) calculates compensation on a 75% of gross basis. In Canada and the US, workers’ compensation payments are not taxable.

Australian states have a variety of compensation rates ranging from 85% to 100% of normal weekly earning in the initial 13 weeks.  “Step-downs” associate with length of claim are increasingly common after this initial period.  Note, wage-loss compensation in Australia is taxable although lump-sum payouts and settlements are not. [See    https://www.safeworkaustralia.gov.au/doc/comparison-workers-compensation-arrangements-australia-and-new-zealand-2021]

 

6.  Eliminate the Waiting Period

In the US, for the initial period of total disability from many work-related injuries (typically 3 to 5 days), workers are effectively self-insured for earnings losses.  The “waiting period” is a deductible imposed on workers. Workers must self-fund this initial period of loss. While some employers allow the use of sick leave or vacation credits to be applied to cover the waiting period, these are generally part of the taxable benefits already paid for by the worker and effectively self-funding.  

Most jurisdictions waive the waiting period for accepted injuries after a “retroactive period” where disability extends greater than a specified number of days or weeks.  Some jurisdictions on’t waive the waiting period at all.  For those states (Hawaii, Oklahoma, and Rhode Island) there is no retroactive period;  all workers suffering wage losses in these jurisdictions have no workers’ compensation indemnity benefits for the waiting period. Nearly a dozen states have retroactive periods of greater than 14 days (Alabama, Florida, Indiana, Kansas, Massachusetts, North Carolina and Virginia all have a 21 day retroactive period; Alaska and New Mexico have a 28 day retroactive period; Nebraska as a 41 day retroactive period).   

That National Commission recommended “…the waiting period be no more than 3 days and that the retroactive period be no more than 14 days”.  Note the “no more than” part of that recommendation—a clear minimum limit.  In the US, I count only 16 states that have met that minimum.  No US state has eliminated the waiting period. 

Although once common in Canada, waiting periods have been eliminated in all but one jurisdiction (Nova Scotia has a 2/5ths of a week waiting period and a retroactive period of 5 weeks). Australian systems generally have no waiting period for workers.  Several states require employers to pay workers directly during their first 5 or 10 days of work-related disability before the workers’ compensation insurer commences payments. 

The waiting period is effectively a subsidy to employers, relieving them of liability for the wage-loss compensation cost of work-related injuries. Waiting periods externalize those costs to workers, their families and often the community. The elimination of waiting periods increases the proportion of the actual cost of work-related injuries nominally paid by the employers. 

 

7.  Raise or Eliminate Age limits or age-related limits on benefits

My recent post on this topic has additional details and, full disclosure, age limits would impact me if I suffered a work-related injury today. 

For years I have spoken about demographic changes, and I posted some current data on this topic in July. 

Today we are seeing the population projections we all knew were coming playing out.  In Canada, the US and Australia, there are growing numbers of older workers in the workforce.  This fact is not just a consequence of aging baby boomers but the growing participation of older workers in the employed labour force. 

What’s driving this greater participation is multifactorial. Apart from the consequences of the pandemic, more of us are living longer and are more fit and healthy in that longevity.  Economics of living longer let alone recent economic challenges brought on by the Great Recession and the pandemic have driven more older workers to stay in or return to the workforce well beyond historical retirement ages.

We need these older workers in the work force.  And they deserve adequate workers’ compensation coverage.  Policies that effectively limit their access to benefits based on social insurance retirement eligibility or a couple of years based on age should be changed.

8.  Increase Funeral/Burial expense coverage

Each work-related death is a tragedy.  Compounding grief and emotional loss with heavy financial costs makes no sense.  Despite the rarity of such tragedies, the financial costs of funerals and burials can be substantial.   Unfortunately, families and communities must bear a disproportionate financial burden as a result.

Most workers’ compensation systems cover some funeral or burial expenses.  The cost of the average funeral has risen but the benefit provisions in most statutes are stubbornly resistant to increases.  At a minimum, families or the estate of a fatally injured workers should receive sufficient funds to cover related funeral and burial costs. 

Some jurisdictions do not cover costs if there is no funeral or burial.  If a worker is lost in a flood and the body not recovered, should the workers’ death be costless to the workers’ compensation system?  Clearly, this should not be an option.  What policy makers must decide is what minimum amount of the be provided to the estate in every case and what additional reasonable costs to memorialize and celebrate the life of the worker should be accepted.   

 

 9.  Provide a Lump-sum Death Benefit

What is the value of a life lost at work? Policy makers have options in answering that question.  I recommend that every policy makers sit across from a grieving spouse learning that the work-related death of a partner before addressing that question.  Speak with the survivors and dependents.  Talk with parents or children having lost their son, daughter or parent.  From experience, I can say their losses—financial, emotional, and personal—are immense and not differentiated by the earnings level of the fatally injured worker at the instant of their work-related death.

All workers have unrealized opportunities – often unimaginable positive ones—that are lost upon death.  Those losses have nothing to do with past earnings.

Some jurisdictions have moved away from wage-based compensation to lump sums. 
For example, a lump-sum death benefit equal to the benefit a maximum wage earner’s yearly compensation for temporary total disability recognizes lost futures.  Thankfully work-related fatalities are relatively rare.  Increasing compensation will add further incentives toward improved safety.

 

10.  Inflation protection

Back in January 2019, I posted some background on the question “Are Workers’ Compensation benefits protected against the rising cost of living?”.  Many workers’ compensation system do adjust payments to workers on long-term claims or permanent disability.  Just how those adjustments are calculated and applied varies widely.

The cumulative impact of inflation when it was running below two percent was modest over the term of most temporary disability claims.  That impact is much greater when annual inflation hits seven, eight or even nine percent. 

Fair, predictable protection of the purchasing power of workers’ compensation benefits should be built into legislation.

Is anyone reforming workers compensation benefits currently?

Many systems have proposed or enacted changes to workers’ benefits but most are limited to modest increases in the maximum insurable earnings.  One of the most ambitious proposals was recently posted for the provincial workers’ compensation system in Prince Edward Island, Canada.  The proposal includes:

Increase benefit rates for workers off work due to an injury from 85 per cent of net pre-injury earnings to 90 per cent.

Increase the cap on annual long-term benefits indexation to six per cent from four per cent. 

Reset the maximum assessable earnings to current Statistics Canada data each year. 

In the case of a workplace fatality, increase financial support for burial expenses to $15,000 from $7,500. 

Increase the lump sum death benefit to 100 per cent of maximum annual earnings. [see an archived version of the proposal at https://web.archive.org/web/2022
0628225241/http://wcb.pe.ca/DocumentManagement/Document/leg_benefitenhancementsconsultation.pdf ]

Which of these policy options will make it into this jurisdiction’s workers’ compensation reform legislation is not known at this writing.

Some closing thoughts

The RAND study noted above asserts [page 106]:

…[T]o improve adequacy, there are two options:

·       Policymakers can increase benefits or

·       reduce earnings losses through increased earnings and employment for workers with disability

 

The latter path still exists.  The fact or its existence has not changed worker outcomes significantly in years.  The employer’s “duty to accommodate”, mandatory reinstatement laws, and vocational rehabilitation provisions have been around for years yet work-related injury still imposes heavy financial costs on workers that are not offset. 

Workers’ compensation benefit enhancements are needed to mitigate at least some of the losses imposed on workers. Policy makers have options to begin to do just that. 

 

 

Are low wage earners adequately covered by workers’ compensation?

Many workers live paycheck to paycheck and struggle to support their families on lower-than-average earnings.  The median usual weekly earnings for women aged 25 and older with high school graduation  only was about $622 per week  in Q4 2018 according to the US Bureau of Labor Statistics ( Series Id:           LEU0252925300).  A work-related injury can have a huge impact on their ability to make ends meet.

Consider this hypothetical: 

Aidy is a 33-year-old cook working in a resort community.  The local hotel where she has worked for most of the last decade is busy all season long but slows in the off season.  Demand for her skills is variable in the off season and dependent on corporate conferences the hotel can attract.  Her employment provides 42 weeks of work most years.  There are not a lot of other job opportunities in the area.  Tourists come to enjoy the relative isolation—just thirty miles off the interstate.  Like a lot of workers in the tourism sector, she relies on unemployment insurance when there is no work.  Aidy is married with three kids, two in elementary school and one preschooler.  Her husband, Raj, worked in the resource sector until the jobs dried up.  He is now the primary care-giver.  The family is dependent on Aidy’s income.  Aidy and Raj live in a rental property with a large lot that allows them to augment their food budget with some home-grown produce.  Aidy’s usual weekly earnings average $600 when she is working or about $483.31 per week if averaged over the whole year (600*42/52.14).  In December 2018, a kitchen helper accidently dropped a heavy pot from an upper shelf on to the cutting surface, flipping a deboning knife off the counter and into Aidy’s right foot.  The knife skewered her foot, severing a tendon.  Aidy’s surgeon has conducted two surgeries and is hopeful Aidy will be on her feet able to work in about six to nine months.  Aidy’s claim for temporary total disability was accepted by the workers’ compensation insurer. 

Aidy’s workers’ compensation will be the only income for this family of five until she is able to return to work.  While she and her employer might expect workers’ compensation to fully cover her earnings, what she will actually receive to cover her earnings loss depends greatly on where she lives. 

The following chart represents Aidy’s case and her workers’ compensation payable in each state using a weekly pay calculation as of Dec 1, 2018.  (With three dependent children and filing as married, Aidy would have 5 federal allowances.)  The data have been ordered from largest workers’ compensation payable as a percentage of Net earnings to the lowest.  

Most states have the same compensation rate:  two-thirds of Gross but a few use a percentage of spendable or net average earnings.  What really matters to lower wage earnings like Aidy is how much income that will contribute toward the support of her family. 

One state bases the compensation rate applied to gross earnings on family composition rather than a flat 66.7%.  Washington State’s Department of Labor and Industries explains this to injured workers as follows [see form F207-227-000 Calculation of Monthly Wage as a Basis for Time-Loss Compensation 04-2019] :

Time-loss benefits are also based on your marital and dependent status. You will receive 60% of your gross wages if you are single with no dependents. If you are married, an additional 5% will be paid. 2% more is added for each dependent child up to five children, not to exceed the maximum time-loss rate.

For the Washington entry in the table, a compensation rate of 71%  of gross was used [60% + 5% + (3 x 2%)].

Only two states meet the National Commission’s recommendation of at least 80% of spendable (Net) earnings.   [The National Commission on State Workmen’s Compensation Laws (1972) recommended a compensation rate moving to at least 80% of spendable earnings].  As noted in my previous post, the National Commission, chaired by John F. Burton, Jr., highlighted that using gross pay as the basis for applying the compensation rate results in inequities—uneven results for workers due to tax factors and number of dependents.  The National Commission emphasized  “spendable earnings would better reflect the workers’ pre-injury circumstances.”

This low wage earner will receive between 72.2% and 80% of pre-injury net (spendable) earnings, with the states basing workers’ compensation on spendable earnings providing among the highest spendable earnings replacement rate.   Interestingly, many of the states without state income taxes are at the lower end of this array.  While low wage earners may take home more pay before an injury, the two-thirds gross earnings compensation rate results in lower income while on compensation.  Aidy will have between $85 and $124 less income per week to support herself and her family.  This is not a trivial amount when many lower income families have little or no disposable income while working. 

In the Canadian context, workers’ compensation in all but one jurisdiction is based on a percentage of Net average earnings.  As noted in my previous post, Net earnings are subject to the compensation rate of 90% ( BC, Alberta, Saskatchewan, Manitoba, Quebec, Northwest Territories and Nunavut), 85% (Ontario, New Brunswick and Prince Edward Island) or 80% (Newfoundland and Labrador).  Nova Scotia has an initial rate of 75% of net but moves to 80% of net for claims longer than 26 weeks duration. Yukon Territory is the exception with a 75% of gross compensation rate.  Lower wage earners like Aidy in most Canadian jurisdictions will have to bear a 10% of 15% loss of take-home pay while receiving temporary total disability workers’ compensation. 

Minimum Compensation Rules

Many jurisdictions define the minimum amount a worker may receive on a weekly basis.  In the US, that amount ranged from no minimum (e.g., Colorado, Maine) to an average weekly benefit of about $200 per week in 2018.  Pennsylvania normally compensates on a two-thirds of gross basis but has a special provision for low wage earners.  If the average weekly wage is below a yearly minimum, the wage rate is set to 90% of the average weekly wage.  For 2018, that minimum was $524.50.  For Aidy, this rule will mean workers’ compensation benefits will actually exceed average spendable income by about $3.78 per week.  North Dakota has a minimum compensation rule based on  $585, equal to 60% of the statewide average weekly wage (SAWW);  however, it that amount exceeds the worker's NET wages, the worker  receives the 100% of Net wages as a weekly compensation rate.

In Canada, some jurisdictions have similar provisions.  WorkSafeBC’s provision is explained this way [see WorkSafeBC, 2018 Net Compensation Table] :

Earnings between $21,200 - $26,700Where a worker’s gross annual earnings are above statutory minimum, but 90% of the average net earnings falls below the statutory minimum of $21,163.65 (or $405.88 weekly), the worker will receive the statutory minimum.Earnings below minimumWhere the rounded gross annualized earnings is below the minimum of $21,163.65 (or $405.88 weekly), the worker receives 100% gross average earnings. For example, if the worker’s gross average earnings is $280 per week (equating to $14,600 annually), she/he will receive from us $280 for each week of wage loss.

If Aidy were working in British Columbia, this provision would mean her compensation payment will be about 92.8% of her average Net earnings—about $31 less per week than her average take home pay. 

Unemployment Insurance (UI) or Employment Insurance [EI]

As alluded to in the hypothetical, many industries depend on unemployment insurance (called Employment Insurance in Canada) to help maintain a workforce during seasonal variations in employment demand.  For lower earners, like Aidy, that additional income is rarely included in the calculation of average earnings. 

Several jurisdictions do take employment insurance into account.  Again, using WorkSafeBC as an example, Aidy’s ten weeks of employment insurance would be taken into account in the calculation per the following Practice Directive [WorkSafeBC, Practice Directive C9-8  Employment Insurance Payments]:

Section 33(3.2) of the [Workers Compensation] Act recognizes that for certain industries and occupations, EI is considered to be a regular supplement to the worker’s earnings and therefore should be included in the worker’s average earnings. Generally, industries or occupations with recurring seasonal or temporary interruptions will be identifiable by the fact that they result in reduced opportunities of employment at similar times in successive years (e.g. operations cease on an annual basis during the winter months, resulting in a general layoff). The reduction in employment opportunities will be due to inherent operational factors such as weather conditions or the cyclical nature of the business (e.g. teachers and fishers)…  Where it is determined that EI benefits are to be included in the calculation of a worker’s average earnings, the payments received within the 12 months preceding the date of injury are added to the gross average earnings, subject to the statutory maximum.

What’s included and excluded from Earnings

As noted in my post on payroll, there is some variation in what might be included or excluded in the calculation of average earnings.  Most, but not all, jurisdictions will include Aidy’s tips in her income.  Overtime will usually be averaged in but practices vary from jurisdiction to jurisdiction. 

Many low-income workers take additional jobs to augment their income from their primary employment.  As explained in my post on multiple job holders, some jurisdictions will include the income from all employment; if the worker is disabled, all income including income from self-employment may be included.  There are, however, some notable exclusions. 

Adding to the hypothetical:

In the three years leading up to the injury, on her days off from the resort, Aidy regularly accepted relief shifts as a cashier at a local truck stop just across the state line near the interstate exit.  The work coincided with the tourist season and increased her weekly income by about  $100 per week for 40 weeks a year—  income Aidy needs to support her family.

In many, but not all jurisdictions, this extra $4000 per year would be included in the calculation of Aidy’s average earnings and result in a larger weekly compensation payment during total temporary disability.  About 5% of the labour force engages in multiple-job holding but some occupations and sectors experience rates nearing 20%.   In several jurisdictions, wage losses from a second or other subsequent job beyond the accident employment would not be covered by workers’ compensation. 

A 2016 survey [see Terrance J. Bogyo, “Moonlighters Wanted”, Perspectives [magazine], IAIABC November 2016] found that earnings from second or additional employment may be excluded from the calculation of average earnings.  The survey results are summarized as follows: 

• 38% of responding jurisdictions would include earnings from all employment in a qualifying time frame up to the maximum
• 14% would base compensation solely on the earnings from the accident employer
• 43% would possibly include earnings loss from second or subsequent jobs under certain conditions.

Conditions for coverage of concurrent employment included: 

• Concurrent earnings being reported to taxation authority
• Accident Employer aware of the concurrent employment
• Concurrent employment is “similar” to the accident employment
• Concurrent employment is workers’ compensation insured (and in the same jurisdiction)

Low wage earners like Aidy will have to check with their workers’ compensation insurer about the possible inclusion of earnings from second or other concurrent employment.

Concluding comments

A recent survey [ “Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers, According to New CareerBuilder Survey”,  Careerbuilder.com, CHICAGO and ATLANTA, Aug. 24, 2017] found more than three-quarters of workers (78 percent) are living paycheck-to-paycheck to make ends meet.  For women in the work force, the situation was even more severe (81%  vs. 75%).  

A Canadian survey also found many workers—particularly those likely to be raising families –need that weekly pay packet to stay afloat (see Canadian Payroll Association's 2017 Survey finds B.C. employees challenged by debt, not saving for retirement, September 6, 2017 ):

...47% of working Canadians report it would be difficult to meet their financial obligations if their pay cheque was delayed by even a single week. The numbers are even higher for millennials in their 30s (55% would have difficulty) and Gen Xs in their 40s (51%).

Every injury damages worker health, erodes their financial security, and limits their options for supporting self and family.  The Temporary Total Disability payments falls far short of what employers, workers and policy makers expect. 

Almost a half century ago, the National Commission provided a threshold—a minimum test for adequacy in workers’ compensation for earnings loss.  It recommended compensation for temporary disability be at least 80% of spendable earnings.  In the case of lower wage earners, few jurisdictions come close to meeting let alone exceeding the minimum level of that recommendation.  Despite the inequity of basing compensation on gross earnings, only a handful of US states have moved to a net earnings or spendable basis for compensation.  

The failure of workers’ compensation to provide adequate compensation for earnings losses due to work-related injuries undermines the social contract of workers’ compensation.  If workers’ compensation was intended to be a substitute for tort, at what point does this gap between benefits payable and actual spendable earnings fail the reasonableness test? 

Are wages or salary fully covered by workers’ compensation insurance?

The vast majority of workers in the US and Canada are employed in jobs “covered” by workers’ compensation insurance.  For many of them, however, that coverage often falls far short of replacing earnings losses for short term disability.

  

While employers often pay premiums on “total” payroll, injured worker salary or wage replacement rates are subject to limiting factors:

·  The compensation rate – Typically two-thirds (66.7%) of average earnings, less often 75-90% of net earnings
·  Excluded earnings, and
·   Maximum insurable earnings or Maximum Weekly Compensation

Consider this hypothetical case:

Marion M. is a business analyst working for a consulting and staffing firm for the last three years. She has a bachelor’s degree and is in her late 20s.  She likes the variety of assignments offered by the employer, which is building her experience in the industry.  It is hard work with long hours some weeks but  with the straight-time pay rate at about $50.00 per hour, bonuses, overtime pay, stock options,  and some great fringe benefits (including tuition reimbursement for her master’s degree now underway two nights per week), Marion is enjoying the career she always wanted. Her usual earnings last year averaged around $2300 weekly (about $120K per year).  Marion is single and has no dependents.  A December 2018 slip and fall in a wet stairwell of her employer’s office building resulted in a back injury and a cracked rib.  Her physician expects her to recover well enough to return to work in about three months but she will likely need physiotherapy to make a full recovery.  Her workers’ compensation claim was accepted. 

Marion and her employer expect workers’ compensation will cover medical costs and her lost wages but in more than half US states and most Canadian provinces, workers’ compensation will likely fall far short of her usual pre-injury weekly earnings. 

Some employer-provided fringe benefits (such the use of a company car, housing allowance, educational assistance, vacation pay, sick pay,  and meals) are considered part of total payroll in most jurisdictions [and included in the premium calculation], but there is no guarantee or legislative requirement for fringe benefits to continue while a worker is disabled and on workers’ compensation.

Marion’s is not an isolated case.  Many workers—particularly higher wage earners— find out after an injury that they are uninsured for what may be a substantial portion of their usual earnings.

Compensation Rate

For most work-related injuries, workers’ compensation insurance policies define a compensation rate, the percentage of average, typical or regular earnings that will be replaced during periods of temporary total disability.  There are two main formulations of the compensation rate:

• Percentage of Gross regular or average earnings (gross earnings before statutory or mandatory deductions), and 
• Percentage of Net or “Spendable” regular or average earnings (Net earnings after statutory or mandatory deductions)

In North America, workers’ compensation payments for temporary disability are tax free.

There is no universal standard for the percentage of gross or net (often referred to as “spendable” earnings).  Exactly which portions of total compensation go into the calculation of gross may vary (see section on excluded earnings).  The formula for calculating net or spendable earnings may vary but is generally considered as Gross earnings less income taxes (state/federal/provincial) and other mandatory deductions.   In the US, those are typically Social Security, Medicare and Unemployment Insurance.  Canadian jurisdictions using Net earnings as the basis for calculating compensation use Gross earnings less Federal Tax, Provincial Tax, Canada (or Quebec) Pension Plan contributions, and Employment Insurance premiums.

The National Commission on State Workmen’s Compensation Laws (1972) recommended a compensation rate moving to at  least 80% of spendable earnings.  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 recognized that those “tax factors” are a big deal and that compensation rates based on a percentage of gross were inherently inequitable.  For higher wage earners, the taxation rate in higher brackets generally increases.  Workers’ like Marion will have a higher proportion of their gross earnings withheld for taxes. Workers with lower earnings from employment and those with many exemptions or deductible amounts will pay a lesser portion of earnings in taxes; this means as the tax liability approaches zero, compensation at a two-thirds of gross becomes more punitive for lower wage earners.  Lower wage earners and the compensation rate will be covered by a future post in this series.    

While most Canadian jurisdictions have met or exceeded this recommended minimum by using Net earnings, few states have adopted the “spendable” base.   

The most common formulation among US jurisdiction remains the two-thirds of gross earnings.  In the accompanying graphic, all states listed in the first chart use this rate or something close to it.  Ohio, for example, uses a 72% rate for the first 12 weeks and two-thirds thereafter.  New Jersey, Oklahoma, and Texas use a 70% compensation rate.  Washington State has a more complex provision with a rate ranging from 60% to 75% depending on marital status and number of dependent children.

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.

In Canada, only the Yukon maintains a 75% of gross formulation; all others have moved to a percentage of Net earnings.  As noted above,  Net earnings are typically defined by a formula: gross average or regular earnings less federal and provincial income taxes, Employment Insurance premiums and Canada or Quebec Pension Plan contributions.  Net earnings are then subject to the compensation rate of 90% ( BC, Alberta, Saskatchewan, Manitoba, Quebec, Northwest Territories and Nunavut), 85% (Ontario, New Brunswick and Prince Edward Island) or 80% (Newfoundland and Labrador).  Nova Scotia has an initial rate of 75% of net but moves to 80% of net for claims longer than 26 weeks duration. 

It should be noted that it is possible for two-thirds of gross to exceed the value of 90% of net depending on tax situation. For workers with larger numbers of dependents and lower income, the two-thirds compensation rate results in far less money in hand to cover family expenses than would result from anything equivalent to or greater than the National Commission recommendation.  For single, high wage earners with few deductions, two-thirds of gross may marginally exceed 90% of net earnings.  

Excluded earnings

Workers’ compensation insurance pays compensation based on pre-injury earnings.  Most have definitions and policy that define that base.  Terms like “average earnings” or “earnings at the time of injury” are often used but don’t count on the definitions being the same. 

In my previous post, [see Workers’ Compensation: What’s payroll got to do with it?  ]  I presented a graphic of showing the average employer cost of employee compensation for an hour of work in the US.  Most of the components of employee compensation are included in the definition of payroll used to calculate workers’ compensation premiums.  Employers (and workers in a few jurisdictions) pay premiums based on the sum of most of these components that include:

·         Wages and Salaries

·         Vacation and Holiday Pay

·         Bonuses and Commissions

·         Payment by employer into statutory insurance and/or pension plans [Social Security, UI, Medicare]

·         Sick pay - Paid Leave provided by the employer 

·         Employee contributions to a 401k [retirement savings],  

·         Deferred compensation plan

·         The value of lodging or rental of an apartment or house provided to an employee

·         Meals provided by the employer (at no cost to the worker)

·         Stand-by, On-call, Travel or “Show Up” pay

·         Payments for hand tools provided by the employee, either directly or through a third part

When it comes to paying claims, however, what workers’ compensation insurers included in calculating the “average earnings” base may vary greatly by jurisdiction. In Nevada, for example, agents use a Form D-5 “Wage Calculation Form for Claims Agent’s Use”  for each claim.  In Nevada, a claim for a typical full-time worker would take gross earnings and tips ( plus the value of room, board and meals, if provided) to calculate the daily rate payable to the worker under the claim. 

In Ohio, the Bureau of Workers’ Compensation policy on wages [BWC Policy #CP-23-01 IV. D]

 BWC shall exclude the following earnings in the calculation of wages, however the list is not all-inclusive:

1.    Bonuses unrelated to work activity (e.g., shareholder bonus, contract ratification);

2.    Profit sharing unrelated to work activity (e.g., owns stock, dividends);

3.    Disbursements from previously deferred compensation;

4.    Retirement benefits paid from social security or other retirement programs;

5.    Employer contributions to employee health care plans;

6.    Payment received for foster care of children;

7.    Non-working wage loss compensation paid in a prior workers’ compensation claim;

8.    Reimbursement for items such as travel, uniforms, etc.;

9.    Temporary total compensation or salary continuation, including occupational injury leave (OIL), paid in a prior claim;

10.  Unemployment benefits;

11.  Severance pay;

12.  Other forms of income reported on an injured worker’s tax return that are not subject to social security withholding, Medicare or self-employment tax, including, but not limited to:

a.    Interest income;

b.    Dividend income;

c.     Taxable refunds of state and local income taxes;

d.    Alimony received;

e.    Capital gains;

f.      Other gains reported on Form 4797;

g.    IRA distributions;

h.    Pension distributions;

i.      Income reported on Schedule E (including, but not limited to, rental real estate, royalties, partnerships, S corporations, trusts);

j.      Social security benefits;

k.     Other income not subject to self-employment tax (Schedule SE);

l.      Tuition reimbursement (1098T).

In Manitoba, there are four methods of determining average earnings: 

• Regular Earnings, 
• Average Yearly Earnings, 
• Probable Yearly Earning Capacity, and 
• Substantiated Earnings. 

There is also a minimum level for personal earnings for those self-employed who opt-in to coverage.  

The policy states: 

The method used will always be the one that best reflects the worker’s actual loss of earnings.

Most workers are compensated for “regular” earnings.  WCB Manitoba Policy 44.80.10.10, in its Policy & Procedures Manual defines Regular Earnings this way: 

Regular earnings are the amount of earnings a worker normally receives as remuneration in the occupation(s) in which he or she was employed at the time of injury. Regular earnings are based on the normal payment schedule (daily, weekly, monthly, annually, etc.) converted to a weekly amount. Earnings from concurrent employment (whether in a covered or non-covered industry) which are reduced or eliminated due to an accident in a covered industry are included in regular earnings. Regular earnings do not normally include overtime, special reimbursements for employment expenses or bonuses that are not regularly paid. [Emphasis added].

For Marion and others with higher salaries or wages, how average earnings are defined and calculated may not be the limiting factor. Even if some of her total compensation package such as profit sharing and educational reimbursements are excluded from the calculation of her base income, her earnings might exceed the maximum compensation amount.  If the jurisdiction has a maximum weekly compensation amount, there’s a good chance compensation for temporary total disability will result in a lower than expected workers’ compensation benefit.

Maximum insurable earnings or Maximum Weekly Compensation

All but two jurisdictions in North America limit the amount of workers compensation payable.  Only Manitoba and recently (September 2018) insure all average earnings; workers in this jurisdiction can expect to receive the compensation rate (90% of Net).  All other jurisdictions limit compensation by either a maximum insured earnings limit or maximum weekly compensation limit. 

Using the compensation rate (typically two-thirds of average gross earnings), it is possible calculate the maximum gross earnings insured by workers’ compensation.  To generate an approximate yearly maximum:

1. Take the weekly maximum compensation for temporary total disability
2. Divide by the compensation rate (e.g., 0.667) and
3. Multiply by 52.14 weeks per year 

This is the implicit limit of insured earnings and is what is shown in the first accompanying graphic for most states.  Note, there is a wide variability of implicit maximum insurable earnings across jurisdictions.  [Note, for Washington State, the rate of two-thirds was used to calculate an approximate gross figure although the actual maximum will depend on family composition as noted above]. [See also an example for Nevada in the footnote.] 

For the four states using spendable earnings, the accompanying graphic shows the maximum spendable earnings that are insured by workers’ compensation in each state.  The gross insurable will be higher but is difficult to calculate because of the impact of federal tax exemptions, varying tax laws, and the impact of other provisions used to calculate spendable earnings.  For workers with many dependents or exemptions, the tax payable will be lower, allowing for a higher gross earnings level.  The gross spendable shown in the top image on the second chart is based on a similar calculation to the one for gross (maximum weekly benefit divided by the compensation rate time 52.14 to approximate the maximum yearly spendable insurable amount). 

For Canadian jurisdictions, the weekly maximum assessable earnings are effectively the maximum insurable amounts, except for Alberta and Manitoba, which have no maximum insurable limits.  The accompanying graphic lower image on the second chart is based on stated maximum assessable earnings posted by AWCBC for 2018.  The maximum yearly insured gross earnings were determined directly from tables or calculators (WSIB Ontario 2018 Net Average Earnings Calculator  and WorkSafeBC 2018 Net Compensation Table – WorkSafeBC ) or by applying the compensation rate to the maximum insurable earnings for each province and applying the appropriate deductions for a single worker with no dependents using the EasyTax Canada calculator (using 2018 tables, annual salary and weekly payments to generate amounts).   

Higher wage and salary earners may be uninsured for earnings above maximum

In the US in 2018, 75% of full-time wage and salary workers had usual earnings of less than $1407 per week; the other 25% earned that amount or more.  The weekly maximum benefit payable for workers’ compensation temporary total disability benefits falls short of that amount in nearly half of all US states.  To put a finer point on this, the third quartile of full-time wage and salary workers age 25 years or older with a bachelor’s degree or higher education had usual weekly earnings in 2018 was $1975.  Only four states had weekly maximum temporary partial disability benefits that would cover all earnings at or above that level.  

Of course, each jurisdiction is different and the distribution of wage earners will vary greatly.  The maximum benefit payable may be based on the state average weekly wage or limited by a formula to an amount greater than that by a third or a half.  That may be suitable for many workers but for workers with higher education or skills that are in competitive demand, a low maximum benefit means the worker and his or her family will find workers’ compensation payments fall far short meeting their financial needs.  The maximum benefit implies a maximum insured amount.  The job may be covered by workers’ compensation but workers’ earnings above that amount are essentially uninsured. 

From the workers perspective, it is clear that earrings above the maximum are not insured and therefore not compensated.  From the employers’ perspective, the maximum assessable earnings in Canada and other limitations as noted in my previous post, limit payroll subject to premium and may signal the need for additional insurance or other financial arrangements to provide adequate coverage of actual lost earnings.  

Concluding thoughts

Limitations such as the maximum weekly benefit or maximum annual insured earnings may unduly harm the families workers’ compensation was intended to assist.  As a result of these limitations, workers’ wages and salaries are not fully covered by workers’ compensation insurance in an overwhelming majority of jurisdictions.

There is a fundamental difference between insuring a job and insuring earnings against loss due to work-related injury.  In every other line of insurance, we expect premiums and benefits to be determined on the basis of loss.  I expect my car insurance to cover me for the value of the car and my home insurance to cover me for the value of the home.  It is insufficient and misleading to speak of the wages or salary as “covered” or “insured” if a significant portion of those earnings cannot be compensated due to caps on maximum benefits.  

The grand bargain or historic compromise that gave us the exclusive remedy of workers’ compensation contained an inherent promise of coverage of all earnings at an agreed upon rate.  That rate may have changed over time and our sense of what is fair compensation may have grown but the expectation that losses will be covered remains.  The exclusive remedy may protect employers from suit but at what point does the bargain become too lopsided?  Failure of workers’ compensation to adequately compensate the lost wages of workers may fundamentally undermine the basis on which the grand bargain, the historic compromise was founded. 

*Footnote

Calculation Example

In Nevada, the calculation creates an effective “Insurable earnings” limit of $70,278 per year.  

Nevada:  The State Average Weekly Wage (SAWW) issued to compute the maximum compensation for disability.  The SAWW is “grossed up” by multiplying by 150% to yield a weekly maximum compensation payable as $897.82 per week or $3904.36 per month (based on Fiscal 2019 limits).  Because these are the maximum amounts of compensation payable, the effective maximum earnings being insured equates to $5,856.56 per month or about $70,278 per year.  

[see http://dir.nv.gov/uploadedFiles/dirnvgov/content/WCS/ImportantDocs/Max%20Comp%20FY19%20Memo%20and%20Calc.pdf ].  

This effectively caps “insurable earnings” at that amount.  Workers with earnings over that amount are effectively uninsured for losses in excess of $70,278.