Geaney: What Costs, Legal Fees Are Deducted From Lien of Employer or Carrier?

Thursday, August 25, 2022 | 0

One recurring question that adjusters and practitioners are often asked is this: In computing the workers’ compensation lien, does the employee get to reduce the employer’s lien by the amount the injured worker had to pay for costs and expenses in the third-party action? Further, does the employee get to reduce the employer or carrier’s lien by the amount the injured worker paid in counsel fees in the workers’ compensation case?

John H. Geaney

Let’s deal with costs first. Many third-party lawsuits are complex and require a substantial outlay of funds for depositions, experts and investigation. When it comes time to repay the workers’ compensation lien, some plaintiffs’ counsel will send the subrogation adjuster a ledger of all expenses paid in the third-party case. Sometimes, those costs can amount to many thousands of dollars.

Nonetheless, NJSA 34:15-40 allows only a reduction in the employer’s lien for costs up to $750. If the costs are only $300, then $300 is the reduction. But if the costs are well over $750, then the lien is only reduced by a capped amount of $750. Before the 2007 amendments to NJSA 34:15-40, the cost cap was only $250!

What about counsel fees in the workers’ compensation case paid by the employee to his or her own attorney? Let me provide a scenario to make this situation clearer. Suppose the employer pays $150,000 in workers’ compensation benefits, consisting of $50,000 in medical and temporary disability benefits and eventually $100,000 in permanent partial disability benefits. In New Jersey, the petitioner’s attorney is entitled to a fee of 20% of the gross workers’ compensation award. So on a $100,000 workers’ compensation award, the legal fee will be $20,000.

Who pays the $20,000 in petitioner’s counsel fee on a percentage award? The answer is that the employer pays 60% of the injured worker’s legal fee and the injured worker pays 40%. 

In the above scenario, that means that petitioner is paying her attorney $8,000 from her award, and the employer or carrier is paying $12,000 toward petitioner’s attorney’s fee for a total of $20,000.

The third-party case settles for $400,000 before the permanency aspect of the case settles. The attorney in the third party sends a check to the employer for two-thirds of $50,000, minus $750 for costs. That takes care of the lien on the medical and temporary disability benefits. The statutory costs have also been resolved.

The permanency award settles next for $100,000. Does the employer have a lien on $100,000 or on $92,000? (Remember, the employee paid her lawyer $8,000 from the $100,000 compensation ward). The employee may argue that she did not receive $100,000 in the workers’ compensation award and, therefore, should not have to pay back two thirds of $100,000. Suppose the plaintiff’s attorney offers to pay back only two-thirds of $92,000. Who is right here?

This issue was decided in 2021 in Panckeri v. Allentown Police Department (2021, reaffirmed 2022). While this is an unreported case, it is useful because the Appellate Division answered this very question head-on. It affirmed the ruling of Christopher B. Leitner, judge of compensation, who found that the permanency lien is based on the gross award in the compensation case. So the employer gets back two-thirds of $100,000, not two-thirds of $92,000. 

The Appellate Division said, “We further agree with the judge that had the Legislature intended to include the petitioner’s fees and costs in Section 40, it could have done so through the 2007 amendment or at any other time in the act’s 110-year history.”

The Appellate Division made one other important point based on a prior case called Kuhnel. It said the employer cannot lien what it paid toward the workers’ compensation counsel fee of petitioner. In our example above, even though the employer paid $12,000 toward the injured workers’ counsel fee, the employer cannot add that $12,000 to its lien and seek repayment of $112,000. The employer’s lien is based on the gross permanency award, which was $100,000. It is not reduced by what the injured worker had to pay her attorney nor increased by what the employer had to pay toward the legal fee of petitioner’s attorney.

John H. Geaney is an attorney, executive committee member and shareholder with Capehart Scatchard, a defense law firm in New Jersey. This post appears with permission from Geaney's New Jersey Workers' Comp Blog.