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.    

Workers’ Compensation: What’s payroll got to do with it?

“Payroll” used to have a simple meaning.  According to the Online Etymology Dictionary:

payroll (n.)1740, from pay (v.) + roll (n.); "total amount paid to employees over a period," hence, via records-keeping, "list of employees receiving pay." [ See https://www.etymonline.com/word/payroll ]

Today, the word “payroll” more often than not refers to the department or system that manage employer costs for a range of employee compensation components. 

For workers’ compensation, payroll can have different meanings depending on your jurisdiction and whether you are a worker or an employer.  Rules in different jurisdiction may use different terms to describe or define payroll.  Common terms include wages, salaries, benefits, fringe benefit, and remuneration or earnings—often used interchangeably—but they are all referring to the same thing:  money paid by the employer to a worker or on behalf of a worker as part of compensation for labour/work performed.  Rating bureaus, legislation or policy for each jurisdiction define which components of employer costs of employee compensation are subject to rating and included in the premium calculation.   

For employers, correctly reporting the payroll components and knowing about any caps or limits is critical to the calculation of the overall workers’ compensation premium; for workers, knowing which payroll components are covered in the calculation of temporary total disability benefits as well as limits on those benefits is essential to determining the adequacy of the coverage in the event of a work-related injury.  More on that in a future post.   For policy makers and those of us who engage in comparative analysis of workers’ compensation coverage, benefits and costs, the exact meaning of payroll in each jurisdiction is essential.

“Payroll” and the Components of Employer Costs for Employee Compensation

The US Bureau of Labor Statistics (BLS) uses  “Employer Costs for Employee Compensation” to more accurately report the main components of employee compensation.  The March 2019 release [USDL-19-1002] provides the following synopsis:

Employer costs for employee compensation for civilian workers averaged $36.77 per hour worked in March 2019, the U.S. Bureau of Labor Statistics reported today. Wages and salaries cost employers $25.22 while benefit costs were $11.55…

Note, in this context, “civilian” workers include those employed in the private nonfarm economy (except those in private households) and workers in the public sector (except the federal government).

I’ve mapped the values from the US Bureau of Labor Statistics release to illustrate the relative size of each component of employee compensation for the average hour worked by a civilian worker.  

Note:  Canadian and Australian data are not available in the same format.  A recent study of manufacturing hourly compensation demonstrated a similar pattern for the main components (social insurance, wages or salaries, and direct benefits) paid by employers in Canada and Australia:

  

The main divisions of employer costs for employee compensation under the BLS study are wages or salaries and benefits.  Many of the benefit components are “wage-like”; these include paid leave for vacation, statutory holidays, sickness and personal reasons.  Some components are related to production needs and include overtime and shift differentials.  Many employers provide insurance coverage for life, health, short-term disability, and long-term disability.  The cost of these coverages may be shared with the employees (with worker contributions deducted from the wages or salary) but are otherwise a form of earnings, providing value that a worker might otherwise have to purchase.  Retirement plans (including defined benefit [DB in the graphic] and defined contribution [DC in the graphic] plans) are essentially deferred earnings typically based on wages, salary and other wage-like compensation.

In the graphic of the employer cost of employee compensation above, the “wages and salaries component” is shown in blue. “Benefits” are grouped into the following categories:  wage-like benefits shown in green, state or federally mandated assessments shown in yellow, and workers’ compensation shown in brown. 

This last group of benefit components are mandatory or statutory payments required of employers.  Social Security, Unemployment Insurance, Medicare, and Workers’ Compensation require employers pay a percentage of “earnings” over and above any contribution required of workers (typically paid out of gross earnings and often lumped together as “payroll taxes”).   

Each jurisdiction has its own rules regarding which parts of employee compensation are to be assessed at what rate.  The workers’ compensation component of this average hourly payroll example is about $0.46 or 1.25% of total employer cost of employee compensation [$36.77]. For workers’ compensation, however, total employer cost of employee compensation does not equate to reportable or assessable payroll for workers’ compensation premium calculations.

Workers’ compensation funding:  Total Premium = Rate  x  Payroll

Workers’ compensation insurers are funded by the premiums paid by employers.  Each employer’s total premium is the sum of the premiums paid for each classification of workers covered by workers’ compensation based on a premium rate (usually expressed as a dollar cost per $100 of payroll) applied to the reportable payroll for workers in each classification.  Generally speaking, industries (or occupations) with higher rates of injury and greater severity of injury in terms of dollar costs for compensation, medical and rehabilitation expenses will attract a higher premium rate.  The underwriting process may also modify rates based on claim experience.  For the purpose of this discussion, these rating provisions are not critical.  What is critical is how “payroll” figures into the process. 

Not all components of employer costs for a worker attract a premium but most workers’ compensation system defined which components are considered “reportable” or “assessable” payroll.  How the payroll is defined can impact the rate required to result in the premium income necessary to cover expected losses (and other costs including administration and profits).   To illustrate this, consider the hypothetical average hour of work represented in the graphic above. The  $0.46 required to insure that one hour represents 1.25% of total employee compensation.   Put another way, a premium rate of $ 1.2669 per $100 applied to all the components of employee compensation would be required to generate hat same $0.46.   A larger rate would be required to generate that $0.46 if some components are omitted from the calculation.  A rate of  $1.35 per $100 applied to all wages, salary and benefits except the federal and state UI, social security and Medicare mandatory employer contributions would be required to generate that same $0.46.  The total employer cost for workers’ compensation insurance remains the same but the percentage or rate depends on the denominator used to determine that cost.

NAIC:  “Total Payroll: universally available… readily verifiable”

The National Association of Insurance Commissioners (NAIC) reviewed various alternatives to total payroll as the basis for premium calculation and concluded: 

Any system of adequate and reasonable rates requires that the same overall premium to be collected to pay the losses incurred and the expenses of conducting the business, regardless of the basis under which such premium is collected. Thus, the simplest and most readily verifiable basis is of the greatest advantage to all concerned. Total payroll offers the only universally available basis and is the most readily verifiable of any base which has been found.

The present approach, which requires the use of total payroll, has demonstrated to be a fair and practical method in computing worker's compensation insurance. A certain amount of premium must be developed to pay for claims and assure the continuance of necessary services to the insured. Since premium is the product of the rate and exposure base, any reduction in payroll through the use of a payroll cap ultimately results in an increase in the rate, otherwise the overall premium collected will not remain the same.

---- Source: Attributed to NAIC as quoted  by Indiana Compensation Rating Bureau, “Payroll - Limited vs Unlimited Payrolls”,  CompClues [website]  at https://compclues.icrb.net/topic/b54ce5dd-a4bb-4184-9b5e-110a20784814/ retrieved Sept 27, 2019)

  

In its annual review of Workers’ Compensation Benefits, Costs, and Coverage, the National Academy of Social Insurance (NASI.org) uses total payroll as its denominator in determining the employer cost of workers’ compensation on a state by state and national basis.  The resulting cost per $100 payroll is not a proxy for an average workers’ compensation rate but a standardized way of looking at the workers’ compensation component of employer cost across jurisdictions and timeframes. 

While “payroll” records are available and auditable, “reportable” or “assessed” payroll may vary greatly from state to state because of limitations and exceptions to what is included or excluded from the payroll calculation.  The “full payroll” approach may also engender a false sense of security about the extent of coverage; just because you pay a premium on total payroll you might assume all components of employee compensation are “covered” against losses.  This is generally not the case.  Different definitions of payroll and restrictions on maximum temporary and permanent benefits effectively leave much of worker’s wages uninsured.  More on that in a future post. 

What’s Reportable as Payroll for Workers’ Compensation?

Most US jurisdictions define “reportable” payroll as including the following:

• 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 party

Other items may be included or excluded from reportable payroll depending on the state. For example, in most states, overtime premiums (e.g., “time and a half “ or “double time” paid for overtime hours worked) are not reportable and only the straight-time portion is included in the reported payroll for workers’ compensation purposes.  Nevada and Pennsylvania do not exclude overtime pay.  Most Canadian jurisdictions include the full value of overtime (e.g.,  if overtime is paid at twice the hourly rate than the full value of the wages for the straight time  and  payment for the overtime including other amounts associated with any overtime) are included in the assessable payroll calculations.  Most states exclude tips and gratuities but New Jersey includes them for most classifications.   [see NCCI,   Basic Manual (2001 Edition) “Rule 2  Premium Basis and Payroll Allocation” for a more complete listing of payroll inclusions, exceptions and limitations commonly used in the US.  Many jurisdictions publish a version of the rule either in the NCCI wording or with minor modifications.  See, for example, The Minnesota Workers’ Compensation Insurers Association, Inc. (MWCIA.org) Basic Manual  or North Carolina Rating Bureau (NCRB.org) “Rule 2- Premium and Payroll”  ].          

Some states limit payroll subject to reporting and assessment for premium calculations.  Notably, Nevada has a $36,000 maximum or cap  [see https://www.wcf.com/about-your-policy-nevada ].  The payroll for each employee is capped at $36,000 annually for the purposes of calculating  workers’ compensation premiums; no workers’ compensation premium is collected for reported payroll above this amount. 

Several other states have maximums for specific occupations.  The Bureau of Workers’ Compensation [BWC] in Ohio also has construction class codes where payroll limitations apply.  Construction industry payroll reporting limits to weekly maximum of $1425; earnings that would otherwise be part of total reportable payroll that exceeds that limit for any individual are excluded from the calculation.  New York  similarly restricts payroll for inclusion in the workers’ compensation premium calculation for dozens of construction classification codes [see http://x.nycirb.org/library/index.cfm?man=wcelmanual&chapter=PART%20I&sub=RULE%20V#collapse195   part G]. 

Although corporate officers, directors, partners and sole proprietors make up a small percentage of workers that may be covered by workers’ compensation, their remuneration is often a significant segment of a firm’s overall payroll.  Many states allow workers’ compensation coverage for these categories of workers but often provide both minimum and maximum dollar values or flat amounts to be included in total payroll for workers’ compensation premium calculations.  In Massachusetts, for example, corporate officers are assessed at a minimum of $11,400 and a maximum of $57,200 while partners are assessed at a flat rate of $50,400 [as at Oct 2018].  Maryland has a corporate officer minimum at $57,200 and a maximum value set at $228,200 with partners as a flat rate of $56,900 [as at Jan 2019]. 

Variations and Alternatives

Not all states use payroll as the basis for calculation of premium.  Most notably, Washington state uses “hours of exposure” – a risk-based metric—as the main basis for the premium calculation.  This works well in a state where workers pay between 20 and 25% of the cost of workers’ compensation through worker-paid premiums.  On the other hand, the premium rates charged workers and employers are not easily compared across jurisdictions and  “worker hours” are far less transparent and auditable than actual dollars paid. 

Washington state uses another alternative to payroll and worker hours for the purposes of its rate calculations in at least one construction-related risk.  Wallboard or drywall installation is assessed “by square footage”.  This is an auditable, objective alternative as a basis for rate calculation. 

Outside the US, the general term “payroll” is often expanded to “assessable payroll”.  This term recognizes that there are limitations and caps.  Assessable payroll will be less than total payroll; as a consequence, jurisdictions with payroll limitations or caps will likely have higher workers’ compensation premium rates than jurisdictions without payroll limitations or caps.  This is particularly important when comparing or ranking workers’ compensation premium rates.

Canadian workers’ compensation boards typically use “assessable payroll” terminology and include both wages and employer-paid benefits (sick leave, bonuses, profit sharing, employer contributions to pensions, accommodations, gratuities, etc.) but notably exclude employer contributions to Canada’s social insurance plans (Canada Pension Plan, Quebec Pension Plan, Employment Insurance).   Each jurisdiction publishes its own rules on what constitutes assessable payroll [See, for example, WorkSafeBC’s Assessment Manual, WSIB’s Operational Policy Manual].   Most align their definitions of earnings to be in line with taxation definitions of earnings reported Canada Revenue Agency (CRA) requirements for reporting earnings [ See Form T4 – Statement of Remuneration issued annually to workers and filed electronically with governments reporting earnings and certain other income and deductions made from earnings].

The reported payroll is typically limited by a per employee maximum assessable earnings amount.  This is typically the maximum insurable earnings. The Association of Workers’ Compensation Boards of Canada (AWCBC.org) provides the following:

        Maximum Assessable / Insurable Earnings

Province/Territory                                               2019

Manitoba                                                            $127,000

Alberta                                                                 $98,700

Ontario                                                                 $92,600

Northwest Territories and Nunavut                     $92,400

Yukon                                                                  $89,145

Saskatchewan                                                      $88,314

British Columbia                                                 $84,800

Québec                                                                $76,500

Newfoundland and Labrador                              $65,600

New Brunswick                                                   $64,800

Nova Scotia                                                         $60,900

Prince Edward Island                                          $55,000

Note:  Manitoba has no maximum insurable but caps assessable payroll at $127,000 except for Personal Coverage available for purchase by sole proprietors, partners or directors where the Maximum Optional Coverage is $502,200 (for 2019). 

Note:  Alberta WCB adopted “compensable earnings” as opposed to “insurable earnings” in 2018 because as of September that year, worker compensable benefits are no longer capped by the individual payroll assessment limit. 

Australian jurisdictions typically define payroll to include most of the same items US and Canadian jurisdictions include.  Queensland’s WorkCover Employers Wages Definition Manual [see https://www.worksafe.qld.gov.au/__data/assets/pdf_file/0007/3040/Wages-definition-manual.pdf] notes the following inclusions and exclusions for assessment purposes:

Inclusions
(a) Total of all PAYG [pay as you go] gross salary and wage payments
(b) All superannuation payments including super salary sacrifice
(c) Fringe benefits and other entitlements having a monetary value
(d) Total of all individual contractor payments for deemed workers
Exclusions
 (f) Any allowances or expenses reimbursed for work related expense included in (a)
(g) Lump sum termination payments included in gross wages (a)
(h) Excess period payments (i) Compensation payments reimbursed by WorkCover
(j) All payments made to, or in respect of, Directors / Trustees / Partners

Additional payroll-based assessments

Three US states have features related to the funding of their workers’ compensation systems that involve additional consideration. 

In addition to the premium charged employers in New Mexico, workers and employers are also assessed on a per capita per quarter.  Employers pay $2.30 per capita and workers employed at the end of a quarter have a $2.00 charge.  The employer portion is an employer cost of employee compensation.  The worker portion is a deduction from earnings. 

Oregon requires employers and workers contribute to the Worker Benefit Fund on an hour worked basis.  In 2019, this assessment is 2.4 cents per hour worked with employers and employees each paying 1.7 cents per hour worked. The employer cost of this payroll amount is a component of workers’ compensation cost; the worker contribution is a deduction from earnings. 

Washington state’s premium is based on hours of exposure and worker in that state pay a proportion of the premium.  This would be considered a deduction from earnings rather than an employer cost component. 

The premium charged may or may not include funding for uninsured employers, oversight, or other functions like occupational safety and health.  States apply separate assessments based either on premium totals or payroll.   California, for example, assesses premiums by applying the following factors for 2019:

Workers’ Compensation Administration Revolving Fund Assessment (WCARF)      0.014479
Uninsured Employers Benefits Trust Fund Assessment (UEBTF)                                   0.000831
Subsequent Injuries Benefits Trust Fund Assessment (SIBTF)                                        0.002737
Occupational Safety and Health Fund Assessment (OSHF)                                              0.003765
Labor Enforcement and Compliance Fund Assessment (LECF)                                      0.003431
Workers’ Compensation Fraud Account Assessment (FRAUD)                                       0.002878

For self-insured employers, a different set of factors are applied to indemnity payments. Whether the base is premium or indemnity, the underlying payroll definition with possible limitations and caps are inherently reflected in the calculation. In comparing rates between jurisdictions, it is essential to determine the impact of these factors. 

Concluding comments

How payroll is defined and the limitations, caps, and exclusions imposed on payroll can vary widely between jurisdictions.  As an employer, if your reported payroll for workers’ compensation includes income above a cap or limit, you will be paying too much in total premium and other assessments that rely directly or indirectly on premium.

For policy analysts,  It is insufficient to compare a workers’ compensation premium rate without considering the payroll base and associated caps or limits to which the premium rate is applied.  That reported or assessable base may differ significantly across any set of jurisdictions under comparison. 

Despite the arguments for the use of full payroll as the basis for premium calculation, the practice may give employers and workers a false sense of security.  Many systems limit the workers’ compensation indemnity payable, effectively limiting the portion of worker earnings that are actually insured.   This dichotomy between payroll that is assessed and what is actually insured is not well understood.  Even in Canada where there is an explicit statement in most provinces regarding insurable earnings, many workers will have earnings above limits for benefits leaving a potentially large portion of earnings uninsured.  It is not just that the compensation rate limits the percentage of earnings covered by workers’ compensation temporary or permanent benefits; caps on weekly benefits payable effectively limit insured payroll.  Such limits, of course, control costs but may leave many workers shocked when they have to access workers’ compensation only to learn they are under insured relative to their expectations.  More on that in a future post.