Workers Comp Supplements Can Skew System
The Workers Comp supplements paid by employers may not be a good idea. One of the most popular subjects in WC is employer supplements. This subject seems to come up in risk management meetings and seminars very often.
Supplements involve the employer offsetting the reduction in pay an employee allegedly experiences when they are on WC benefits.
- Waiting Period
- Employee’s Loss of Earnings (???)
Employee is restored to Pre-Injury Wage
- 6667 of Pre-Injury Wage (Tax Free)
- Pre-Injury Wage = $600 week (Taxed)
- Comp Rate = $400 week (Tax Free)
- Employer Supplement = $200 week (Taxed)
- Employer Supplement = $135 week (Tax Free)
- Employee Receives = $535 week (Tax Free)
- Employee Receives = $750 week (Taxed)
- Motivation to Work? (Gone)
The first area concerning supplements is the Waiting Period. This is usually the first three to seven days that the employee is out of work. The Waiting Period is not paid until the employee has been out of work for a certain amount of days.
For example, the first seven calendar days may not be payable until an employee is out of work for more than 21 days. The main reason for a waiting period is to encourage the employee to rapidly return to work. If the employer pays the first week of benefits, this built-in encouragement is eliminated.
The basic function of WC benefits (as with most insurance) is to make the employee “whole again.” Most states require the WC insurer to pay 2/3 of the employees’ average weekly wage subject to a maximum. The benefits are paid tax-free.
In the above chart, the employee is receiving $600 per week as an average weekly wage. The WC weekly benefit rate is $400. The employer has decided to provide a supplement of $200 (taxed) per week to raise the employee’s wages back to their pre-injury wage. The after tax rate of the supplement is $135. When added to the WC weekly benefit rate, the employee is receiving $535 tax-free. Converting the employee’s pay back to a taxed rate, the employee is now receiving $750 per week taxed. The employee is now receiving a larger pay rate without having to work.
The employee has little or no motivation to return to work. The WC Supplement has eliminated the employee’s motivation to return to work. I recommend the avoidance of providing WC supplements for this very reason.
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Use sick days for those initial days that aren’t covered. If you are going to pay any money to the employee, then pay it all. Don’t let the indemnity payments hit your experience modification.