June 2009

Behind the veil of self-employment - how to calculate true residual earning capacity after a workplace injury

The calculation of a self-employed worker's entitlements under section 40 is never straightforward.  It is complicated by the minimisation of the injured worker's earnings from the business.  On 7 May 2009, Deputy President Bill Roche provided some further guidance in the case of Nohra v Sydney Plastering and Construction Pty Ltd [2009] NSW WCCPD 48.  He considered the methods involved in calculating post injury earnings or ability to earn of self employed workers.

The case

The employer was a scaffolding company and the injured worker was a working director of the company.  The worker was unfit to perform full pre-injury duties but was fit to perform other sedentary duties such as supervisory tasks.

Following the injury, the worker returned to part time restricted supervisory duties with the company. He drew $460.00 per week from the company’s profits for 20 hours of work per week and declared this as his post injury earning capacity.  The insurer declined liability for ongoing weekly compensation on the basis the worker was capable of earning equal or more than his pre-injury wages in the capacity of a full time supervisor.  Therefore he had no entitlement to compensation.  

The arbitrator in the Workers Compensation Commission determined the worker was fit to perform duties of a supervisor on a full time basis.  She assessed the wage loss by calculating the difference between the worker’s pre-injury earnings and his capacity to work in the open labour market as a full time supervisor.   The worker appealed. 

Appeal

Deputy President Roche found the evidence established the worker was fit for full time sedentary or light duties, avoiding prolonged standing or walking.  He observed the duties, in the worker’s current suitable self employed capacity, involved some supervisory activities and many administrative and managerial activities, (that of a managing director of a company).  

The Deputy President did not accept the worker’s capacity to earn was $460.00 per week.

The basic test for calculation of a suitably employed worker’s ability to earn in some suitable employment is his actual earnings.  However, this approach is not adopted if the evidence establishes the actual earnings are not a true reflection of a worker's residual earning capacity, such as when a worker is self employed.

In this case the Deputy President considered evidence relating to the time spent by the worker engaging in all activities of his company, such as his physical and mental input into the business, including management and other administrative tasks.  He concluded the payment of $460.00 per week, by way of drawings for 20 hours per week, did not take into account the worker’s knowledge, experience, effort and capacity as managing director and supervisor of the company.  He was of the view these factors had a significant impact on the profitability of the business and in turn determined the value of the worker’s labour.

Calculation methods

The Deputy President concluded there was no single way to calculate a figure in such circumstances.  In his decision, he suggested two different methods:

  1. Determination of the net income being received by the worker for his or her labour in the company.  This is based on the income of the company after allowances for overhead expenses, cost of material, labour, maintenance and depreciation of plant and the like.  The financial records of the company are needed for this method.
  2. The second method involves the calculation of the value of the worker’s labour to the business without reference to the financial records of the business.  The Deputy President analysed three possible ways to assess the value of a worker's labour:
  • The cost involved in hiring an employee to do the worker’s job
  • The amount the worker would have been paid if he were employed by another employer on restricted duties; or
  • The difference between the cost of employing a worker with no incapacity,   and the cost of employing a worker to supplement the reduced efforts of the   injured worker to carry out the business.

In order to utitlise any of these methods, evidence of the time spent by the worker on and the nature of his activities would be required.  

Strategies

There are many instances where self employed injured workers return to suitable employment in their own business.  They then claim section 40 payments for the difference between their drawings and pre-injury probable earnings.  

To ensure a workers ongoing entitlement is appropriate, in addition to financial records, an insurer needs to access information concerning the nature of activity and hours of work so that a value can be placed on labour, including any managerial skills.  The worker will also need to provide details of his or her pre and post injury duties and what, if anything he or she has needed to do to replace their reduced capacity since returning to work on suitable duties.

Often workers are not forthcoming in revealing the nature of their duties and hours of work.  Try to utilise the interview skills of rehabilitation providers.  Another tool is to include the obligation to disclose the details in an injury management plan.  If the information is still not provided after suitable discussions, an injury management dispute may be considered to encourage full disclosure.