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Background
In SB 899, several changes were made to Labor
Code section 4660 regarding determination of permanent disability ratings in the California
Workers' Compensation System. These changes
are summarized below, but are discussed in depth
in the Permanent Disability Rating Schedule
(PDRS, 2005):
One of the basic principles of PD rating, “diminished
ability to compete,” was replaced by “diminished
future earning capacity.” Other basic principles
remain the nature of the injury or disfigurement,
age, and occupation;
The “nature of the physical injury or disfigurement”
shall incorporate the AMA Guides for both
descriptions and percentage impairments;
The rating schedule developed by the
Administrative Director shall adjust from
impairment to arrive at a diminished earning
capacity by a formula based on empirical data of
average long term loss of earnings from each
type of injury for similarly situated employees,
including age and occupation (Section 32.b.2);
The new schedule adopted January 1, 2005
(Section 4660(e)) is applicable to injuries before
January 1, 2005 if there has been no
comprehensive report, no medical treater’s
determination of the existence of permanent
disability, and no obligation for employer to issue Labor Code Section 4061 notice (i.e., TD has
not ended).

This paper is concerned with the issue of determining functional diminished earning capacity (DFEC). Specific to this issue, 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
.
 

For Dr. Hall’s article, “Determining Diminished
Earning Capacity in the
California Workers'
Compensation Program:
The "SEDEC" Method,”

click here.

For Dr. Hall’s article, “The "New" Role for Vocational Rehabilitation in the California Workers' Compensation System: A Comprehensive Vocational Rehabilitiation Evaluation,” click here.


Understanding of these key concepts, and their
historical conceptual underpinnings, are critical for
attorneys and DFEC experts (Vocational
Rehabilitationists involved with submission of expert
testimony re: PDRS issues). However, to understand
the practical and mechanical issues involved with
rebuttal testimony on these above issues, attorneys
and DFEC experts must be prepared to discuss why
rebuttal testimony is required on a given case.


Rebuttal testimony on DFEC issues requires at least
a basic understanding of the following concepts:
1) what the AMA ratings cover and what they don’t
and 2) the role that DFEC plays in rating and how it
interacts with the AMA rating.

Attorneys and DFEC experts must be prepared to discuss why rebuttal testimony is required on a given case.

On this first issue, it is clear that the authors of SB 899
understood that there is a difference between
“impairment” as discussed in the AMA Guides and
“disability”, which includes a DFEC component. L.C.
4660 states that the injury / illness shall be described
utilizing the A.M.A. Guides to the Evaluation of
Permanent Impairment, 5th Edition
.

Defining impairment is clearly the purpose in using
these AMA guidelines. According to the AMA Guides,
impairment is defined as “an alteration of an
individual's health status; a deviation from normal
in a body part or organ system and its functioning”.
However, the Guides also make it clear that the
guidelines 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 make it clear that the guidelines 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 A.M.A. Guides and the A.M.A.’s Disability
Evaluation, 2nd Edition
discusses the factors that
should be considered in the determination of “work
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.


Of the above factors, according to the AMA, it is within the professional expertise, skills, and toolkit of the DFEC expert (Vocational Rehabilitationist) to deal with the issues of the worker’s education, acquired skills, knowledge, and work performance. Additionally, DFEC experts are trained to evaluate the use of empirically-derived labor market, economic and wage data as it pertains to “past earnings and future potential earnings”.
DFEC experts are trained to evaluate the use of empirically-derived labor market, economic and wage data as it pertains to “past earnings and future potential earnings”.

It is beyond the scope of their role for the DFEC
expert to address the myriad legal and policy issues
related to the PDRS and the policy implications and
intent of the legislature with regard to LC 4660.
However, the DFEC expert can, on a given case,
explain the impact of an individual’s impairment(s)
on their future earning capacity so that a comparison
to the PDRS rating can be made.

Estimating work disability and the impact of that
disability on employability and earnings capacity
requires that a comparative analysis be done to
determine the “actual” loss of earnings capacity
through DFEC analysis vs. the estimated FEC
described in the PDRS.

To accomplish the DFEC analysis, the expert must be able to discuss the following issues:

1. How do functional limitations that are
related to an individual’s impairment(s)
impact their employment opportunities and
earnings capacity?
2. What is the contribution, if any, of
non-industrial factors, i.e. pre-existing
impairment, age, geographic location,
language skills, etc. to an individual's
reduced employability and earning capacity?
3. What are the specific vocational implications
of an individual’s impairment, i.e. what is the
interaction between pain or stamina issues
and specific job requirements or what is the
difficulty making particular job accommodations
in particular work settings or industries?
4. What are the particulars of an individual’s
occupation and/or their labor market and
the impact of those factors on their future
employment and earnings capacity?
5. What was an individual’s pre-injury global
employability and earning capacity?
6. Post-injury, what is the impact of an
individual’s impairment(s) on earning capacity
over time, i.e. assuming an individual can perform
certain types of occupations (given jobs
reasonably available in a given labor market)?
7. What portion of the pre-injury earning capacity
(by % and total dollars) will likely be lost?
8. What difference would various interventions
(skills or educational training, job
accommodations, etc.) make on the person’s
earning capacity and what would the cost
and time frame of those interventions be?
9. What is the impact of time on those earnings
loss estimates, i.e. what is the difference in
lost earning capacity when using a 3-year,
5-year, 10-year, total worklife or some other post-injury work period?

The DFEC expert can explain the impact of an individual’s impairments on their future earning capacity so that a comparison to the PDRS rating can be made.

In order to answer the above questions and
ultimately address the DFEC issues, a
comprehensive vocational evaluation should be
conducted. Of course, some natural variability will
always exist due to unique individual factors such
as age, education, language skills, work history, job
skills, geographic location, and the nature & severity
of the impairment(s) and disability. For instance,
testing does not always need to be done, but should
be accompanied by explanation, i.e. no testing was
done because of the age of the individual. The
following steps would typically provide the foundation
for DFEC opinion:

1. Obtain the standard AMA WPI rating;
2. Determine what functional limitations exist;
3. Perform comprehensive assessment of
work skills;
4. Determine transferability of work skills;
5. Determine employment options;
6. Consider job accommodation needs;
7. Analyze standardized data on local and
statewide wage rates;
8. Research benefit rates by industry and
occupation;
9. Research employment rates and statistical
worklife data;
10. Calculate DFEC and DFEC modifier.

Additional issues that attorneys and DFEC experts
should expect to consider and address include the
following:

• Should DFEC be determined after the standard
rating is modified by age and occupation, or will an
adequate DFEC analysis already have considered
these issues, thus making their separate
consideration redundant?
• On a given case, what is the difference between
actual pre-injury earnings and earnings capacity?
• Given that workers are mobile and economic
conditions vary, what type of data should be utilized
regarding a worker’s “labor market”?
• What are “similarly situated” employees?
• What is a “long-term” loss of income?

 

What is the role of “age” and “occupation”
within the DFEC analysis?


As presently laid out in the PDRS, DFEC analysis
occurs after there has been a standard rating and
adjustments are made for age and occupation.
It can easily be argued that DFEC analysis is
redundant with and/or competes against the age
and occupation adjustments. Some attorneys are,
in fact arguing that DFEC should replace the
standard rating as well as a person’s level of
impairment is embedded within their earnings
capacity. Others may argue that the standard rating
reflects more than earnings loss as it describes
changes to a person’s ability to perform activities
of daily living in non-work roles.

Seabury, et al (2004) discussed this issue:

“In principle, the data used in Reville, Seabury and Neuhauser (2003) and the follow up work in Reville et al. (2004) are appropriate for the task of adjusting earnings losses. However, in neither of these documents are there sufficient data reported to RAND to implement a full set of earnings loss adjustments. First, these reports tend to focus on final ratings, which are the ratings that have been adjusted for age and occupation. However, given that the age and occupation adjustments are still going to be used in the new schedule, it seemed that the initial standard rating is a more appropriate tool with which to calculate the diminished future earnings capacity adjustments.”
Reville (2005) found that modifying the standard
rating by age was of dubious value:
“We also call into question the appropriateness
of the California system’s use of age as an
adjustment factor. The California system operates
under the assumption that permanent disabilities
are more disabling for older workers, specifically those above age 39, and less disabling for
younger workers. Our results suggest that the relationship between age and earnings losses is
not so clear. In general, we do not find substantial
evidence of large disparities between the earnings
losses associated with similarly rated claims for injured workers of different ages (focusing on the ratings before adjustment for age). What evidence we do find suggests that, if anything, the youngest workers face the highest cumulative earnings losses from disability three years post-injury. This finding suggests that the age adjustment does little to enhance equity, and may even detract from it
(page 90).”
Obviously, a person’s past and future earnings
capacity is impacted by their age and prior
occupation(s). DFEC analysis, when properly
conducted, can add real value to how the issues of
age and occupation are treated. Before earnings
capacity can be determined, however, it is necessary
to first determine “employability”, which can be
defined as what jobs is a person qualified for by
virtue of their skills, education, and other
qualifications? To determine employability a person’s
“competitiveness” or “placeability” within a given
industry and labor market must also be considered.
The impact of age and the demands of specific
occupations are centrally and naturally considered
in the DFEC process, which argues against making
modifications for those factors before doing the
DFEC analysis.

The impact of age and the demands of specific occupations are centrally and naturally considered in the DFEC process, which argues against making modifications for those factors before doing the DFEC analysis.


Earnings vs. Earnings Capacity

This paper explores the concept of earning capacity,
with a special emphasis on how earning capacity
may be distinguished from expected earnings. Any
legal process requires that an award for diminished
earning capacity be supported by reliable evidence.
Earning capacity is the expected earnings of a worker
who chooses to maximize
their actual earnings.
Earning capacity differs from expected earnings only
when a person has a preference for an occupation
that differs from that of an occupation that is a “maximizer” of expected earnings. Often, there will
be no reliable evidence that the person possessed
an earning capacity in excess of their actual past
earnings, and that, if they were "earnings
maximizers", their actual earnings would be higher
than had actually been demonstrated.

The Federal Longshore & Harbor Workers Act (Section 908) defines earnings capacity as follows:

“Earning capacity - that is, potential earnings if he or she were to have been employed on an ongoing basis until retirement…The wage-earning capacity of an injured employee in cases of partial disability under subdivision (c)(21) of this section or under subdivision (e) of this section shall be determined by his actual earnings if such actual earnings fairly and reasonably represent his wage-earning capacity, provided, however, that if the employee has no actual earnings or his actual earnings do not fairly and reasonably represent his wage-earning capacity, the deputy commissioner may, in the interest of justice, fix such wage-earning capacity as shall be reasonable, having due regard to the nature of his injury, the degree of physical impairment, his usual employment, and any other factors or circumstances in the case which may affect his capacity to earn wages in his disabled condition, including the effect of disability as it may naturally extend into the future”.
So, given the above it can be argued that there is a
difference between “actual earnings” and “earnings
capacity”. Fortunately, providing DFEC expert
opinions regarding future earnings capacity is
feasible, as earnings capacity is a function of the
interaction between “worker variables”, i.e. education,
skills, and work experience and “environmental
variables”, i.e. the labor market, economic conditions,
etc. Predicting “earnings capacity” is, fortunately,
simpler than predicting “actual earnings”, which is
impossible. It also allows all parties to avoid the
gray and sticky issues such as an individual’s
motivation and adaptation to change, which is
difficult to assess in any meaningful way and is
arguably less relevant to the issue of
“earnings capacity”.


It can be argued that there is a difference between “actual earnings” and “earnings capacity”.

What is the worker’s “labor market”?

The size of the labor market and the economic
conditions impacting “supply and demand” of job
openings are part of the DFEC analysis. Empirical
data regarding actual job openings and labor
market projections exists that can provide the
needed data inputs. However, workers are mobile
and the labor market within which the worker is likely
to participate needs to be considered. Typically, it
makes sense to consider a particular labor market
within a reasonable commute from where the worker
resides as well as a broader labor market, such as
the entire state. The actual impact on earnings
capacity between local and statewide labor markets
is typically small, but for some occupations can be substantial.


The actual impact on earnings capacity between local and statewide labor markets is typically small, but for some occupations can be substantial.

What are “Similarly Situated Employees”?

As you will see discussed below, the vagueness of
this concept is making attorneys, judges, and DFEC
experts scratch their heads. It is unknown exactly how
or from where this concept originated, but it likely had
at least some origin in the RAND studies. In this excerpt
from their 2003 study, Reville, et al. commented:
“In this study, we use data on over 300,000 PPD ratings in California; all cases rated by the Disability Evaluation Unit (DEU) with an injury date between January 1, 1991, and April 1, 1997. Since several years of post-injury earnings must be observed to estimate earnings losses, injuries occurring after April 1, 1997, are not used. We are able to match most (over 69%) of the injured workers in this sample to both (1) similar workers and (2) to administrative data on wages from the Employment Development Department (EDD) to estimate the impact on earnings experienced by these workers. Thus, we are able to create a database that includes the type of impairment, disability rating, and the estimated earnings losses for 241,685 PPD claimants in California injured from January 1, 1991, to April 1, 1997” (page 18).
Defining what makes workers “similar” was discussed by Peterson (1998) in the context of what would need to be done to construct a disability rating system:
“First, a set of predictors is defined--characteristics that can be objectively identified and measured. In the case of the disability schedule, predictors might include workers’ injuries, restrictions and other residuals in their physical capabilities, their occupation, age, education, and gender. These predictors are now identified in the current schedule and in other documents such as the AMA Guides. Second, measurements of these predictors are compared to a numerical scale that measures the outcome one wants to predict, known as the “criterion” variable. For the disability schedule, the criterion is the amount of wage loss that injured workers have suffered”.
The vagueness of this concept is making attorneys, judges, and DFEC experts scratch their heads.

What is “long term” loss of income?

The impact of injury on earnings loss over time was extensively studied by RAND. Reville, at al. (2005) reported the following:
“Pre-injury wage is not a satisfactory proxy for future earnings, particularly when estimating the long-term consequences of permanent disabilities. First, without the injury, the worker may have experienced wage growth over time, which the preinjury earnings will not measure. Figure 5.1 illustrates that while the injured worker soon exceeds pre-injury earnings, his or her earnings nevertheless fall below what he or she would have earned had the injury never occurred. Second, if the injury had not occurred, it is possible that the injured worker would have been unemployed or exited the workforce for various reasons. It cannot be assumed that the injured worker would have earned the equivalent of the pre-injury earnings in every post injury earnings period” (page 42).


In other legal systems, statistical worklife concepts
are used to estimate earnings capacity over time.
Worklife is the number of years individuals would
spend in the labor force based on mortality
conditions, labor force entry and exit rates, and
demographic characteristics, including age,
education level, occupational group, and gender.

Based upon the RAND data, the percentage
earnings loss is greater in the years immediately
following injury/illness and decreases over time.
The effect of this is that the shorter a time period is
used, the larger the percentage earnings loss will
be. So, if “long term” is defined as three years, the
percentage earnings loss will be greater than when
a longer period of 5 or 10 years or a total worklife
approach is used.

The shorter a time period is used, the larger the percentage earnings loss will be.

Modifying the AMA Rating – What Do You Do
with the Estimated DFEC Percentage?


Much discussion is occurring around alternative methods to modify the AMA standard rating with a
revised FEC modifier. This is a separate topic in
itself that can only be partly addressed through the
DFEC evaluation process. However, by statute and
case law that is evolving, it appears that, once
determined, the DFEC must somehow be plugged
back into the PD rating process so that the DFEC is
used as a modifier to the standard AMA rating as
opposed to being a “stand alone” estimate of
disability.

The current PDRS utilizes an estimated FEC factor
that was derived from the range of estimated
earnings losses for a cross section of impairment
types statistically determined through the RAND
research. Obviously, there has been controversy with
regard to the underlying data and how the Schedule
chose to include the FEC factor. The earnings loss
data and DFEC process is discussed in the
Schedule (DWC, 2005).

In the Schedule, the DFEC factor has a range of 1.10
to 1.40. The standard AMA rating is multiplied by this
FEC factor, essentially limiting the potential increase
to the standard AMA rating from a minimum of 10%
to a maximum of 40%. Obviously, this methodology
significantly limits the potential contribution of the
FEC factor to the overall rating.

Alternative methods are being proposed that would
increase the potential “value” of the FEC factor. Interested readers can refer to the recommendations
of the California Commission on Health & Safety
and Workers’ Compensation in their February, 2006
report (CHSWC, 2006) and the methodology utilized
by San Francisco WCAB’s Judge Lam in the Gustavo
Cordon v. SCIF case. In both these cases, the
estimated DFEC percentage, either by itself or after
adjustment by an additional replacement factor (see
the CHSWC paper), is divided by the AMA standard
rating percentage as opposed to being multiplied.
Other differences exist with these two methods, but
both can significantly increase the potential
contribution of the DFEC to the overall PR rating.

It appears that, once determined, the DFEC must somehow be plugged back into the PD rating process so that the DFEC is used as a modifier to the standard AMA rating as opposed to being a “stand alone” estimate of disability.

Summary
This article has attempted to provide a discussion
of relevant literature and a conceptual framework for
attorneys and Vocational Rehabilitationists to use in
conducting DFEC analyses.

Ultimately, the role of DFEC in the permanent
disability rating process becomes a public policy
debate regarding the “adequacy” of the PD benefit.
Should it be determined that the FEC factor is
currently undervalued in the PD rating process, then
alternative methods for evaluating FEC are available
and likely provide more flexibility and accuracy in the
evaluation of an individual’s employability and
earning capacity than can be accomplished through
the existing PD rating process.

Ultimately, the role of DFEC in the permanent disability rating process becomes a public policy debate regarding the “adequacy” of the PD benefit.


Dr. Robert Hall has worked in the vocational
evaluation and rehabilitation field since 1973 and
has maintained his own consulting practice in
San Diego since 1980. Dr. Hall frequently serves as
an expert witness on workers’ compensation,
personal injury, employment law, and spousal
support cases. Dr. Hall has a Ph.D. in Human
Rehabilitation from the University of Northern
Colorado. Since 1994, he has been the Director
of the Work & Health Technologies Center at
San Diego State University and is an Adjunct
Professor in SDSU’s graduate Rehabilitation
Counseling Program.


Robert Hall, Ph.D.
Certified Rehabilitation Counselor
Certified Disability Management Specialist
Hall Associates
7290 Navajo Rd. #105
San Diego, Ca. 92119
Phone: (619) 463-9334
Fax: (619) 463-9337

info@rehabsource.org
http://www.rehabsource.org/

For a detailed CV,
click here.

Bibliography

California Labor Code. http://www.leginfo.ca.gov/

A.M.A. Guides, 5th Edition. American Medical Association: Chicago, IL.

A.M.A.’s Disability Evaluation, 2nd Edition. American Medical Association: Chicago, IL.

Federal Longshore & Harbor Workers Act. U.S. Department of Labor. http://www.dol.gov/esa/regs/compliance/owcp/lhwca.htm

Permanent Disability Rating Schedule Analysis (2006). California Commission on
Health & Safety and Workers’ Compensation, Department of Industrial Relations.
Website: www.dir.ca.gov/chswc.

Peterson, M., Reville, R., Kaganoff Stern, R., and Barth, P. (1998) Compensating Permanent Workplace Injuries: A Study of the California System. RAND Corporation, Santa Monica, CA.

Reville, R., Seabury, S., Neuhauser, F. (2003) Evaluation of California’s Permanent Disability
Rating Schedule Interim Report. DB-443-ICJ. Prepared for the California Commission on
Health and Safety and Workers’ Compensation.

Seabury, S., Reville, R. & Neuhauser, F. (2004) Data for Adjusting Disability Ratings to
Reflect Diminished Future Earnings and Capacity in Compliance with SB 899. WR-214-ICJ.
RAND Corporation, Santa Monica, CA.

Reville, R., Seabury, S. Neuhauser, F., Burton, J., and Greenberg, M. (2005)
An Evaluation of California’s Permanent Disability Rating System. Prepared for the California
Commission on Health and Safety and Workers’ Compensation.

Schedule for Rating Permanent Disabilities (2005). Division of Workers’ Compensation,
Department of Industrial Relations, State of California.


The New PDRS and the
Determination of DFEC
by Robert Hall, Ph.D., CRC, CDMS

Robert B.Hall, Ph.D., is a vocational rehabilitation professional, consultant, and teacher who created the “SEDEC” method of analyzing diminished future earning capacity [DFEC].
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