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?