What is an equitable maximum insured earnings level?

My last post on maximum insurable earnings for workers’ compensation coverage generated a lot of email and questions.  Several people had responses like this one:

“…it does not appear that you addressed the root question of whether or not WCB adequately compensates high earners.  Rather, you imply that, as we are operating in a similar manner as everyone else, we must then be providing adequate compensation.  Just because everyone operates in a certain manner does not mean that said practice is a good practice.”

This is a fair point.  The blog post focused on practice and did not really address what would be “adequate” or qualify as “good practice”.  There are, however, some serious difficulties in coming to a judgment about what an equitable maximum insured ought to be.

Although WorkSafeBC's maximum insured earnings is similar to many other workers' compensation systems, it is higher than most US jurisdictions but lower than the insured earnings in Ontario, Alberta, Manitoba and at least some Australian schemes.  Without an agreement on what the maximum ought to be, it is hard to judge the adequacy of any particular jurisdiction.

I note that section 37 of Saskatchewan’s new Workers’ Compensation Act provides for the long-standing maximum of $55,000 per year to be raised to $59,000 per year with provisions for increases until the maximum is “equal to 165% of the product of the average weekly wage and 52.”  Why 165%?  The Committee of Review in 2006 had recommended the maximum be “not less than 165% of the “average annual wage” rounded to the nearest $100.”  Ontario’s workers’ compensation legislation in section 38(1)(c)sets the maximum at 175 per cent of the average industrial wage for Ontario.  Why 175%?  I’m not clear on why this particular percentage was chosen but it appears to be an effort to ensure a higher proportion of upper-level earners are fully covered.

British Columbia’s Workers Compensation Act uses a formula in Section 33.  A Board Minute sets the maximum for 2013 at $75,700 using the formula.  That is about 169% of the 2012 average industrial aggregate wage as reported by Statistics Canada. Is this equitable?  The last Royal Commission on Workers’ Compensation in British Columbia examined the current formula and made the following recommendation:

“[Recommendation]  … 139. the maximum wage rate under Section 33(1) and (6) of the Workers Compensation Act be adjusted annually to an amount equal to two hundred percent of the average industrial wage in British Columbia for the twelve month period immediately preceding the adjustment.”

Why 200%? In its discussion, the Royal Commissioners cite “fairness” and included a quote from a background paper prepared for the United States National Commission on State Workmen’s Compensation Laws, [John F. Burton Jr.,  1972]:

“To be equitable, the program must treat all workers fairly. According to one concept of fairness, most workers should have the same proportion of their wages replaced. However, a worker with a low wage may need a higher proportion of his lost wage in order to sustain himself and his family. … A high income worker who can afford to purchase private individual protection may have his weekly benefit limited to some reasonable maximum.”

Sir William Meredith’s 1913 final report to the Ontario government, which is the foundational document for workers’ compensation in Canada, made only one oblique comment in his narrative regarding the maximum.  He writes:

"...there is no reason why highly paid managers and superintendents of establishments should be entitled to compensation out of the accident fund to an amount greater than the highest paid wage earner would be entitled to receive.”  

The "highest wage earner"  is likely to have a unique earnings level in each province.  The intent, however, appears similar to the National Commission’s intent:  cover all earnings for all workers except for the very highest earners.

In the absence of any authoritative absolute statement on where to draw the line, an appropriate test of adequacy of earnings coverage in any jurisdiction might be to identify the proportion of the employed labour force with earnings below, say, the 90th percentile of earnings from employment.  The 90^th percentile could be calculated from a number of potential sources from standardized surveys to actual tax returns. It has the advantage of being applicable regardless of the how skewed or splayed the distribution of earners might be without actually determining specific occupational roles.

Perhaps you have a better way or think the idea of a maximum insurable is outmoded.  Feel free to add your own comments and ideas.  

Does workers’ compensation adequately cover workers with relatively high earnings?

A reader of this blog recently pointed out that workers with relatively high earnings may not be adequately covered by workers’ compensation.  One’s expenses tend to parallel one’s net earnings; a temporary loss of earnings because of an occupational injury or disease puts all earners at risk of having insufficient income to meet their expenses.  While one might expect all workers to have less income on workers’ compensation, high wage earners lose disproportionally more than lower wage earners. 

I had to agree with the logic of this observation, however, the truth of the statement depends greatly on how you define “workers with relatively high earnings” and on the jurisdiction you are considering.

The compensation a worker receives under most workers’ compensation programs is the product of some measure of insurable earnings and a compensable percentage rate.   Neither the rate of compensation nor the level of insurable earnings is standard; both the rate of compensation and the maximum insurable earnings are matters of workers’ compensation policy.  How much compensation a worker with relatively high earnings will receive depends on these two policy factors and whether or not the benefits are taxable. 

Virtually all workers’ compensation systems in Canada, the US and Australia impose a maximum insurable or compensable earnings limit; income above that level is not compensated. Manitoba is an exception to the rule with no maximum on insurable earnings and a $111,000 per worker limit on assessable earnings.  BC has a maximum of $75,500 while Alberta’s max for 2013 is $92,600 (the highest in Canada).  Ontario’s maximum is $83,200.  Saskatchewan’s current maximum is the lowest in western Canada at $55,000.  The Maritime Provinces are in the same range as Saskatchewan while Quebec has a $67,500 maximum.  WorkSafeBC uses 90% of net while WSIB in Ontario has an 85%  of net rate.  Nova Scotia has a 75% of net rate with a step up at 26 weeks to 85% (presumably to compensate more adequately for injuries of greater severity).  Prince Edward Island provides 80% of net with a step up to 85% of net at 38 weeks.  The Yukon retains a 75% of gross calculation. 

In the United States, most states have a 66.67% compensation rate for individual time-loss claims as opposed to predominant model in Canada of compensating some percentage of net earnings.  I could not find a concise listing of maximum workers’ compensation insurable earnings but in 2012, the National Academy of Social Insurance noted that the maximum weekly temporary total disability (TTD) benefit ranged from $437 in Mississippi to $1,457 in Iowa. Both of these states provide a two-thirds of gross average earnings benefit level so the maximum earnings covered would range from a low of about $34k to $113k annual gross income.  Connecticut pays disability benefits at a rate of 75% of the spendable average weekly earnings to a 2010 maximum of $1168 per week or about $90K gross per year. If we define workers with high earnings as those earning at or above the maximum insurable, these workers will generally do better in Alaska, California, Connecticut, District of Columbia, Illinois, Iowa, Massachusetts, New Hampshire, Oregon, Vermont, and Washington where the maximum weekly benefit is greater than $1000 as opposed to Arkansas, Georgia, Idaho, Kansas, Louisiana and Mississippi where the weekly maximum temporary disability rate is $600.

Australian WorkCover schemes also vary in terms of the maximum earnings covered.  A worker with relatively high earnings needs to check with the jurisdiction in question to be certain if a maximum earnings level will limit their coverage.  ComCare has no explicit maximum.  Western Australia and the Northern Territories have maximum weekly earning restrictions that equate to well over $100k per year.  In New South Wales, weekly compensation is based on the “current weekly wage”, a rate that may be as much as 100 per cent of the rate of remuneration for one week of work (excluding overtime, shiftwork, payments for special expenses and penalty rates) or as little as 80 per cent of average weekly earnings (including regular overtime and allowances), depending on the presence or absence of an enterprise or industrial agreement (collective agreement).  In New Zealand, the ACC has a maximum weekly benefit of 80% of average weekly earnings which equates to a benefit maximum of around $96000 per year; earners with incomes above about $120k per year are expected to have supplemental insurance coverage.  Most compensation payments in Australia and New Zealand are taxable. 

This problem of the maximum vexes workers’ compensation systems.  On one hand, the historic compromise and exclusive remedy that are at the foundation of workers’ compensation are meant to provide timely, adequate income compensation without reference to the Courts.  On the other hand, the adequacy of income declines for earners above the maximum to the point where the adequacy of benefits may be questioned.  For earners earning, say, double the maximum, effective compensation may be less than 50% of typical net earnings. 

Should there be a maximum?  Since premiums are often based on a definition of “insurable” payroll, arguments for the sustainability of the system will tend to support a maximum.  How high should the maximum be?  That may depend on the spread of earnings for the population being insured… and that will vary greatly by jurisdiction.