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Calculating Workers’ Compensation Settlements

Published October 11, 2022

When an employee experiences a workplace injury or illness, they are entitled to file an injury claim with their employer’s workers’ compensation insurance provider. However, when the employee is unsatisfied with the settlement offered or chooses to forgo a workers’ compensation claim and sue their employer directly, the case enters litigation. Due to the complexities involved in the workers’ compensation settlement, one or both parties may consult with an experienced forensic economist to secure accurate damage calculations and expert witness testimony.

With over thirty years of professional experience, The Knowles Group has provided damage calculations and expert witness testimony for law firms representing plaintiffs and defendants in workers’ compensation claims across North America. Contact us today to schedule a free consultation and discuss how our services can strengthen your case.

What is Workers’ Compensation?

Workers’ compensation is a mandated insurance program designed to compensate employees recovering from work-related accidents. The majority of employers throughout the United States are required by law to pay into a workers’ compensation program based on the labor laws of the state where the business operates. Employees can receive workers’ compensation benefits for the following economic damages:

  • Past and future medical expenses
  • Lost wages
  • Lost earning capacity
  • Vocational retraining
  • Death and funeral expenses

Filing for workers’ compensation is comparable to filing any other insurance claim. Once filed, the insurance company will approve or deny the claim based on the information discovered during their investigation. If approved, the insurance company will offer the employee a lump-sum payment or a structured benefit plan depending on the circumstances. If the insurance company denies the claim or the employee does not accept the settlement offered, the case then moves to an administrative hearing or trial heard by a workers’ compensation judge.

Average Workers’ Compensation Settlement Value

When calculating the value of a workers’ compensation settlement, several factors must be considered, including the employee’s average weekly wage, the nature of the accident, the severity of the accident, the degree of negligence of each party, and more. With so many factors to consider, final settlement values can range significantly.

Based on data presented by the National Safety Council (NSC), the average cost for all combined workers’ compensation claims between 2019 and 2020 was $41,353. The most costly cause of workplace accidents was motor vehicle accidents, at $85,311 on average. In contrast, the most costly accidents by nature were those resulting in amputation, at $118,837 on average.

Is There a Formula For Calculating Workers’ Compensation?

There is no simple formula used to calculate workers’ compensation settlements. The value of each settlement depends heavily on state law, the employee’s average weekly wage, whether the injury or illness is temporary or permanent, and whether the injury or illness disrupts the employee’s ability to work either partially or entirely. With so many variables to consider, a deep level of analysis and calculation is required to reach the final settlement value.

Calculating Benefits Based On Average Weekly Wage

One crucial piece of the workers’ compensation settlement that can be determined relatively easily is the gross average weekly wage. The weekly average wage is the foundational starting point for every workers’ comp settlement which must be determined before considering the additional factors surrounding the case. An injured employee will generally receive a percentage (often 66% depending) up to the state’s weekly maximum (+/- $1000 weekly) regardless of their average weekly income.

To calculate a rough average weekly wage, complete the following steps:

  1. Using past pay stubs, collect all the wages earned 52 weeks before the accident (including any secondary jobs).
  2. Separate those wages into four 13-week quarters and add each quarter’s wages together.

Q1: $10,354

Q2: $10,952

Q3: $11,202

Q4: $11,119

  1. Take the total for each quarter and divide by 13 for the weekly average by quarter.

Q1: $10,354 ÷ 13 = $796.46

Q2: $10,952 ÷ 13 = $842.46

Q3: $11,202 ÷ 13 = $861.69

Q4: $11,119 ÷ 13 = $855.30

  1. Add the three highest totals and divide by 3 to determine the year’s weekly average wage.

Average Weekly Wage = $842.46 + $861.69 + $855.30 = $2,559.45 ÷ 3 = $853.15

  1. Include supplement pay such as bonuses and incentives by dividing the previous year’s total by 52 to determine the weekly supplemental income, then add that figure to the yearly average.

Total Supplemental Income = $1,433 ÷ 52 = $27.55 + $853.15 = $880.70 =

 Gross Average Weekly Wage

  1. Multiply the gross average by the percentage granted based on the state of employment to determine the weekly benefit payment.

Gross Average Weekly Wage = $880.70 × 66% = $581.26 = Weekly Benefit Payment

Damages To Consider in a Workers’ Compensation Claim

The primary purpose of workers’ compensation is to compensate injured workers for economic losses incurred due to a work-related accident. With that being the case, the following economic damages must be considered when calculating a workers’ comp settlement:

  • Medical Expenses
  • Lost Wages
  • Lost Earning Capacity
  • Vocational Retraining
  • Death and Funeral Expenses

There are also cases where an injured worker is wrongfully terminated, leading to a more complex situation that involves calculating wrongful termination damages.

Medical Expenses

All past and future medical treatment related to a workplace injury or illness, including ambulance, emergency room visits, appointments, surgeries, medications, medical equipment, transportation, etc.

Suppose an employee slips and falls at work and requires an ambulance ride, an ER visit, surgery, physical therapy, transportation, and medication. In that case, the insurance company must assume all out-of-pocket expenses incurred.

Lost Wages

Workers’ compensation damage calculations must also consider a percentage of the employee’s income lost during the injury period. This includes all past income from the date of the accident and all future income based on the duration of the injury or illness.

Suppose an employee experiences a temporary total disability resulting from a workplace injury, and their gross weekly average wage is $880.70. In that case, their workers’ compensation settlement will reflect these lost wages per state workers’ compensation laws. Often this is ⅔ of the employee’s weekly average, or $581.26 in this example.

Lost Earning Capacity

Suppose the work-related injury or illness is severe enough to compromise the employee’s future career growth, such as promotions. Then, pay raises, future job opportunities, and lost earning capacity will also be considered in the settlement value.

Suppose an employee suffers a permanent workplace injury and their lost earning capacity totals $85,300. In that case, the insurance company may need to compensate the employee.

Vocational Retraining

Suppose the injury or illness prevents the employee from returning to their pre-accident position or another position that utilizes their previous training, experience, or education. In that case, the cost of retraining for a new job must be considered.

Suppose an employee must enter a new vocation due to a work-related injury, and retraining costs $7,500. In that case, the insurance company will include that training cost in the workers’ comp settlement.

Death and Funeral Expenses

Suppose the work-related accident leads to the employee’s death. In that case, the workers’ compensation benefits will cover a portion of all death-related expenses such as the funeral, burial, cremation, etc.

Suppose an employee passes away due to a work-related injury. In that case, the insurance company must compensate the family for death and funeral expenses which average between $6000 and $10,000 nationwide.

Workers’ Compensation Benefit Categories

Regarding workers’ compensation benefits, an injured employee will be placed in one of four categories based on a doctor’s medical evaluation. Initially, the afflicted employee will be placed on temporary disability, either partial or total. If the employee’s recovery plateaus, they’ve reached “maximum medical improvement,” or MMI. At this point, a doctor will evaluate the employee’s eligibility for permanent disability, either partial or total.

Partial Disability Benefits

Partial Disability Benefits are reserved for injuries that allow an employee to continue performing light-duty job tasks. These injuries may be temporary or permanent, depending on the severity of the injury or illness. With Partial Disability, the employee’s benefits are generally calculated by reducing their average weekly wage by their earning capacity while injured.

Suppose an employee earned a weekly average wage of $1500 before their Partial Disability injury but now only has an earning capacity of $1000. In that case, their benefits might be ⅔ of that reduced total. Therefore, the employee would receive $666.66 in weekly benefits for the duration of their injury.

Total Disability Benefits

Total Disability Benefits are reserved for injuries that prevent employees from performing their job before the injury in any capacity, during their recovery period. During this time, employees generally receive benefits equal to ⅔ their average weekly wage before the injury, capped at $1,000 per week in most states. Once again, the total disability may be temporary or permanent.

Suppose an employee earns a weekly average wage of $900 before a Total Disability injury. In that case, they may receive benefits equal to ⅔ of that average. Therefore, the employee would receive $600.00 in weekly benefits for the duration of their injury.

Permanent Impairment Benefits

In addition to injury benefits, employees who have been scarred, lost bodily function, or experienced any other permanent impairments are entitled to Permanent Impairment Benefits. Using guidelines from the American Medical Association’s Guide to the Evaluation of Permanent Impairment, doctors will assign the employee an impairment rating in the form of a percentage. The employee is then compensated based on that percentage considering their ability to function with the impairment.

An employee suffers a permanent impairment and loses partial function of their left arm. Using AMA guidelines, their doctor determines they now have 35% use of that arm. Therefore, if state law allows a $125,000 payment for a complete loss of use in an arm, the employee would be entitled to receive 65% of $125,000 or $75,000 in Permanent Impairment Benefits.

Understanding “No-Fault” Insurance Programs 

A critical consideration about workers’ compensation insurance programs is their classification as “no-fault” insurance programs. While the “no-fault” classification of workers’ compensation allows employees to access income and medical benefits without considering which party was at fault, it also prohibits employees from suing their employer once they’ve chosen to apply.

Suppose the employee believes they have grounds for a lawsuit against their employer. In that case, they must forgo workers’ compensation and assume the risk of receiving zero payment if they lose the case. Additionally, employees injured while intoxicated or as a result of starting a physical altercation at work are not eligible for workers’ compensation.

Workers’ Compensation Is Income Protection Insurance

One crucial difference between a workers’ compensation claim and other personal injury claims is its classification under income protection laws. Due to this classification, employees receive no compensation for pain and suffering or other non-economic damages. Workers’ compensation is designed for the sole purpose of compensating for economic damages due to a workplace injury or illness.

Statute of Limitations

The statute of limitations for workers’ compensation claims is also significantly less than standard personal injury claims. Worker’s compensation claims have a statute of limitations of a single year.

We Provide Accurate Workers’ Compensation Calculations

When attorneys and their clients work with The Knowles Group, they gain access to decades of damage calculation experience, expert witness testimony, and professional networking experience that greatly strengthen a workers’ compensation case.

Contact The Knowles Group to schedule a free case evaluation if you’re involved in such a case.

Eric Knowles, MBA

The Knowles Group has been providing professional economic services to the legal community since 1979. The firm has worked on behalf of thousands of attorneys in a dozen states and Canada. Testimony has been provided in both federal and state venues.