In Longshore and Defense Base Act cases, how do courts address post injury wage earning capacity when the injured worker owns a business? It all depends on the efforts expended by claimant in his business. To quote the Benefits Review Board:
An employee’s earnings from self-employment may establish his wage-earning capacity. Sledge v. Sealand Terminal, 16 BRBS 178, 181 (1984); Mitchell v. Bath Iron Works Corp., 11 BRBS 770, 779 (1980). However, profit from ownership is not included in determining earning capacity. Seidel v. General Dynamics Corp., 22 BRBS 403 (1989). Thus, an administrative law judge should determine whether income from self-employment is the result of an ownership interest or claimant’s personal services; where a claimant’s business income is the direct result of the claimant’s “personal management or endeavor,” or the claimant performs such extensive services for the business that the income represents salary rather than profits, the income should be considered in determining wage-earning capacity. Id. at 506-406; see also McGee v. Estes Express Lines, 480 S.E.2d 416 (N.C. Ct. App. 1997). Business income, however, may not always provide a reasonable basis for determining wage-earning capacity. In the context of calculating a claimant’s average weekly wage pursuant to Section 10(c) of the Act, 33 U.S.C. §910(c), the Board reversed an administrative law judge’s calculation based only on the claimant’s gross earnings in self-employment, stating that a more rational calculation is based on the cost of hiring another person of equivalent skill and experience to perform the same work, i.e., the value of the work performed, less the aforementioned profits or goodwill. Roundtree v. Newpark Shipbuilding & Repair, Inc., 13 BRBS 862, 867 n.6 (1981), rev’d, 698 F.2d 743, 15 BRBS 94 (CRT) (5th Cir. 1983), panel decision rev’d en banc, 723 F.2d 399, 16 BRBS 34 (CRT) (1984), cert. denied, 469 U.S. 818 (1984). In Roundtree, the Board also stated that,
there is no indication that the value of claimant’s work equaled his wages less his income tax deductions. Income tax deductions are not necessarily indicative of actual business expenditures or the costs of doing business as an independent contractor. For example, in this case, claimant’s deductions include such items as depreciation allowances for equipment which, in reality, did not decrease his actual income.
Roundtree, 13 BRBS at 869. The Board thus concluded that while a formula based upon gross earnings less income tax deductions may be easy to apply, there is no basis for assuming that the reasonable value of a claimant’s services is equal to his net earnings. Id. Accordingly . . . we reject employer’s contention that claimant’s post-injury wage-earning capacity must be derived solely from claimant’s reported gross income . . . as that figure does not necessarily fairly and reasonably represent his wage-earning capacity.
Long story short: base the post-injury wage earning capacity on the actual work that the claimant performed post-injury. Why? Because, pursuant to Section 8(h) of the Longshore Act, the “overarching objective is to ascertain the wage that would have been paid on the open labor market to the claimant in his injured condition.” Reddick v. Universal Mar. Servs., BRB No. 00-1021, 2001 WL 36400340 (Jun. 13, 2001). Thus:
“[W]age-earning capacity” refers to “an injured employee’s ability to command regular income as the result of his personal labor.” See 2 Arthur Larson and Lex K. Larson, Larson’s Workers’ Compensation Law, §83.05 (2000). Income from a business owned by the employee, even though he contributes some work to it, is not included in claimant’s earnings and should not be used to reduce disability compensation. Id.; Joy Technologies, Inc. v. Workmen’s Compensation Appeals Board, 155 Pa. Cmwlth. 9 (1993). Where, however, the business income is the direct result of the claimant’s “personal management or endeavor,” or the claimant performs such extensive services for the business that the income represents salary rather than profits, the income should be considered in determining wage-earning capacity. Larson’s, §83.05; see Seidel v. General Dynamics Corp., 22 BRBS 403 (1989)(Board affirmed administrative law judge’s finding that claimant was more like an employee than an owner, but held that [ALJ] erred in including in claimant’s wage-earning capacity estimated “profits” because no payments were anticipated); see also McGee v. Estes Express Lines, 125 N.C. App. 298, 480 S.E.2d 416 (N.C. Ct. App. 1997) (inquiry is whether skills used by the claimant in running his business would enable him to compete in labor market); Nannery v. GAF Corp., 75 A.D.2d 697, 427 N.Y.S. 2d 306 (N.Y. App. Div. 1980). In contrast . . . the term “earnings” as used in Section 8(j) is a much broader concept, as “wages” and “salaries” are merely exemplary of earnings under Section 702.285, and this definition includes “revenue” earned by a business without regard to whether it is gross revenue or net revenue. See 20 C.F.R. §702.285. Thus, claimant’s total earnings from self-employment for purposes of Section 8(j) do not automatically equate to his wage-earning capacity, and they must be analyzed to determine whether they represent gross receipts or profits as opposed to wages paid for claimant’s personal labor. Only the latter is properly considered in evaluating wage-earning capacity.
Even state courts differentiate between business profits and wages. A case from the Court of Appeals of Virginia, Smith v. Smith, 527 S.E.2d 463 (Va. Ct. App. 2000) has a great summary of the state workers’ compensation decisions addressing this issue. But there are also decisions that fall on the other end of the spectrum, particularly with a sole proprietorship in which the claimant actually performed work after his work comp injury.
My two cents: follow the BRB and consider the claimant’s business efforts.
Attribution: Photo courtesy of Flickr user Chris Potter.