Determining Diminished Earning Capacity: 'SEDEC'

Sunday, April 10, 2005 | 0

Ed Note: Though this article deals with specific California laws, some of the concepts are universal thus we have chosen to publish this article for all states.

Background

This article will describe a method for determining "Diminished Earning Capacity". I have named this method "SEDEC", which stands for Stepwise Estimate of Diminished Earning Capacity. Although there are a variety of civil and administrative legal settings within which the SEDEC method might be utilized, this article will specifically focus on use within the California Workers' Compensation Permanent Disability Rating System (PDRS). The SEDEC methodology and rational is explained below. Sample application of the SEDEC method is also provided in Part Two.

Note: the methodology described in this article is not intended as a comprehensive legal or regulatory interpretation of SB 899's intent regarding the PDRS. However, as efforts are made to create an accepted procedure for the determination of "diminished earning capacity" in the PDRS, the author believes "SEDEC" offers a reasonable option, combining an objective, empirically-based method with needed simplicity and administrative efficiency.

As a result of SB 899, Labor Code section 4660 has been fundamentally changed. The governing language in LC 4660(b) now requires that the PD rating process for each case take into account the potential for "diminished earning capacity". The only currently available information concerning how that is to be accomplished is in the statutory language itself.

LC 4660(b) states:

"A numeric formula based on empirical data and findings that aggregate average percentage of long-term loss of income resulting from each type of injury for similarly situated employees".

Key concepts from this section are as follows:
* Numeric Formula
* Empirical data
* Aggregate average percentage of long-term loss of income;
* Resulting from each type of injury for similarly situated employees.

Because of the immense variation that exists on individual claims, application of these simple concepts necessarily involves extraordinary complexity. Each of these critical concepts needs further exploration.

Numeric Formula
No such formula currently exists. Creating such a formula is feasible, but must include the key variables that adequately address the impact of "disability" on an individual employment potential and earning capacity. SEDEC is an attempt to capture the underlying process and provide a numeric formula.

Empirical Data
Empirical data exists that can be used to support such a process. Sources include:

* vocational evaluation and functional capacity evaluation processes, using standardized tests;
* medical information, including physician or psychologist estimates of work capacity;
* standardized occupational information systems & software(Dictionary of Occupation Titles (1992) & O*NET (2005) based systems);
* labor market data (State and Federal labor market estimates, industry-based surveys, job listing services);
* wage data (state & Federal wage surveys, industry surveys & private wage surveying firms.

Long Term Loss of Income
this concept implies that loss of income cannot be viewed just in the short-term, but needs to be evaluated over the longer term. In civil litigation, the loss of earnings is calculated over the "statistical worklife" of the individual. Worklife adjustments are commonly made by experts to reflect changes that reasonably result from individual variances in occupation/industry, education, age, gender, and disability. It is reasonable that "statistical worklife" be included in any calculation of income lost as empirical data exists that addresses these variants. Bringing "statistical worklife" into this equation also allows for flexibility and adaptability to the estimate. These issues include:

* need for part-time work;
* difficulty finding and keeping a job as a function of labor market; pre or post-injury work disability;
* difficulty finding and keeping a job as a function of pre or post-injury work disability.

Lastly, estimates of remaining "statistical worklife" meets the statutory need to express "long-term loss of income" as a percentage. The SEDEC Formula described below includes worklife as an optional additional factor to include.

Resulting From Each Type of Injury for Similarly Situated Employees - of all the concepts included in the statutory language, this is the most obscure. Each type of injury is difficult enough due to the vast number of impairments, but the need to allow for multiple or combinations of impairments adds immense complexity. Anyone familiar with the Federal Workers' Employees Compensation (FECA) or Longshore & Harbor Workers (L & H) programs can testify to this.

However, the phrase "similarly situated employees" gives little clue as to what or how which was to be considered in the "numeric formula". Hypothetically, a matrix could be created to address "long-term loss of income" for all occupation groups and all medical impairments, but no data remotely exists to support this. Even if it did, excluding from such a matrix other critical individual factors such as education, skills, interest/motivation, and labor market would make it close to useless for purposes of predicting "loss of income".

The A.M.A. Guides

LC 4660 also states that the injury / illness shall be described utilizing the A.M.A. Guides, 5th Edition. As discussed in the Guides, they cannot be used to make direct estimates of "work disability", but are intended for more general use as an estimate of "whole person impairment" and an "individual's overall ability to perform activities of daily living". The Guides do describe a process for determining functional limitations or "work restrictions", i.e. what a re worker can and cannot do and how activity might aggravate the medical condition.

The A.M.A. Guides and the A.M.A.'s Disability Evaluation, 2nd Edition identify the larger issues surrounding determination of "disability" and "earning capacity". These factors are listed as follows:

* an individual's age, education, acquired skills, knowledge, and work performance;
* an individual's motivation and adaptation to change;
* work requirements;
* work environment;
* state of the job market;
* local economic conditions;
* past earnings and future potential earnings.

Role of the Vocational Rehabilitationist

The role of the Vocational Rehabilitationist (VR) is accurately characterized in the above A.M.A. publications as "bridging the gap" between "work limitations" and "disability" as reflected in diminished earning capacity. In order to form expert opinions regarding diminished earning capacity, a Vocational Rehabilitationist must sequentially evaluate an individual in terms of what they can offer a potential employer. Thus, the basis for an opinion regarding diminished earning capacity must be built upon a foundation of "Employability". The A.M.A. Guides defines Employability as follows:

"The capacity of an individual to meet the demands of a job and the conditions of employment associated with that job as defined by an employer, with or without accommodation". (p. 318)

The A.M.A. definition of Employability speaks to a specific match between a given worker and a job within a specific work environment. For purposes of evaluating future Employability and impact on "long-term loss of income" within an administrative proceeding a broader definition of "Employability" is called for.

Determination of Employability should result in a list or "pool" of occupations that best represent a workers employment potential. Depending upon the individual, this employment potential might be best represented by 1-2 jobs (persons with many years of experience & skill development in a single or well-defined occupational area e.g. teacher, journeyman welder, police officer, etc.) or a larger group of occupations with similar demands and potential (administrative assistant, clerk, manual laborer, etc.).

For these purposes, I propose the following alternative definition of "Employability":

Employability: "The collective employment strengths & limitations that an individual has by virtue of their innate abilities, education, work capacities, skills, and knowledge".

























In addition to Employability, the VR must consider how an individual's Employability interacts with realities of the labor market and workplace. The A.M.A. Guides calls this consortium of factors the "Place Ability" of the individual. This refers to the process of taking one's employment potential, their "Employability", and applying it in a real labor market.

For purposes of this analysis "Place Ability" is defined as follows:

Place Ability - the ability of the individual to obtain a job and retain a job, given the realities of the current and future job market (supply & demand, growth rates, turnover), the "competitiveness" of the job applicant, i.e. the ranking of an applicant against their fellow applicants, (more or less experience, skills, etc.), and the "Employer-Employee Fit", i.e. how the job applicant matches up with the employer environment, and the need for and availability of job accommodations".

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Thus, it is proposed that the role of the Vocational Rehabilitationist in the PDRS should be to help to "bridge the gap" between impairment and work disability by providing an individualized analysis of Employability, place ability, and earning capacity over the workers remaining worklife.

Part Two of this article will review the sequential steps to the SEDEC Method.

About the Author: Robert Hall, Ph.D., Certified Rehabilitation Counselor, Certified Disability Management Specialist. Dr. Hall can be reached at (619) 463-9334. Fax (619) 463-9337, or e-mail at info@rehabsource.org.

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The views and opinions expressed by the author are not necessarily those of workcompcentral.com, its editors or management.