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.
