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.