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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 a
rticle 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.

: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
SEDEC is an attempt to capture the underlying process and provide a 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’s employment potential and earning capacity. Focusing simply
on prior occupation, as previously done in the “Schedule” is incomplete and
inadequate. Other factors, i.e. level of education, geographic location, language
skills, etc. contribute just as much, if not more, to the prediction of future
earning capacity.

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 health professional 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

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, a loss of earnings
is calculated over the “statistical worklife” the individual. Worklife adjustments are
commonly made by experts to reflect the variability that can reasonably result with
regard to education, age, gender, and disability. It is reasonable that “statistical
worklife” be included in any calculation of income lost as empirical data exist that
address this factor. Bringing “statistical worklife” into this equation also allows for
needed flexibility and adaptability in the estimate around several issues.

These issues include:
• time out of the workforce for vocational rehabilitation;
• limitation to part-time work;
• difficulty finding a job as a function of pre or post-injury work disability;
• ddifficulty keeping a job as a function of pre or post-injury work disability;
• future medical treatment, i.e. surgery, etc.;
• a progressive medical condition that becomes more disabling with age.

Lastly, an estimate 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.

Resulting From Each Type of Injury for Similarly Situated Employees – of all the
concepts included in the statutory language, this is the most obscure. Rating each
type of medical impairment is difficult enough due to the many types of
impairments. The need to allow for multiple or combinations of impairments adds
immense additional complexity. Anyone familiar with the Federal Workers’
Employees Compensation (FECA) or Longshore & Harbor Workers (L & H) programs can testify to this.

The phrase “similarly situated employees” gives little clue as to what or how which
was to be considered in the “numeric formula”. Theoretically, a matrix could be
created to address “long-term loss of income” with regard to all occupation groups
and all medical impairments, but no data exists to develop such a matrix. 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”.

Next Page >

Determining Diminished Earning
Capacity in the California Workers'
Compensation Program:
The "SEDEC" Method

by Robert Hall, Ph.D., CRC, CDMS
June 2006
> Proving PD Under New LC §4660
> Determining DFEC with "SEDEC"
> How to Review Subpoenaed Records
> + Excel Organizers
> Interview with Jettie Pierce Selvig
> Interview with John Parente
> Smoking Gun