WORKERS COMPENSATION A PROGRAM FOR REFORM IN SOUTH AUSTRALIA

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1 Business SA Enterprise House 136 Greenhill Road Unley South Australia 5061 Telephone Facsimile BUSINESS SA

2 HEADER CONTENTS HEADER Introduction 2 Overview 3 Recommendations 5 1. Workers Compensation In South Australia 6 2. SA Workers Compensation Scheme Performance 8 3. SA Workers Compensation Scheme Compared with other states 9 4. The Case for Change Reform is Required 16 APPENDIX A Worker Entitlements Under SA Workers Compensation Scheme 23 APPENDIX B The Nation on a Page Summary of Key Workers Compensation Scheme Indicators 26 APPENDIX C AM Actuaries Redemptions & Scheme Funding 28 APPENDIX D AM Actuaries Modelling of Potential Legislative changes 30 APPENDIX E AM Actuaries Assumptions and Modelling Scenarios 32 APPENDIX F Return to work data 34 References 36 Glossary 37

3 INTRODUCTION > South Australian workers have the most number of days of paid compensation; > South Australia has the highest ratio of injured workers who do not return to work in the first six months of their claim; > South Australia businesses pay an average of 3%, well in excess of the other states. As the State s leading business organisation, Business SA is highly regarded as an advocate for business on key issues affecting the future of the South Australian businesses sector. Earlier this year, in our capacity as the voice of business in South Australia, Business SA released A blueprint for South Australia s future, a forward thinking policy document calling for support and action from the State s key political parties to ensure long-term economic prosperity for South Australia. One of the Blueprint s recommendations was the development of nationally consistent workers rehabilitation and compensation legislation, as this State s businesses are paying too much for our current under-performing workers compensation scheme. Business SA s Workers Compensation A Program for Reform in South Australia calls for and recommends major reform of the scheme. The scales of South Australia s workers compensation scheme are well out of balance with the rest of Australia. Urgent reform is required to achieve a system that is affordable to the business community and provides an appropriate level of coverage for injured workers. Business SA calls on the State Government to take action now. Workers Compensation A Program for Reform in South Australia is a bold policy statement that calls for legislative changes to bring South Australia into line with the rest of Australia. The plan is vital for the long term economic viability of South Australia and recommends a system which is fair, sustainable and affordable. Rob Chapman Businesss SA President January 2007 South Australia s workers compensation scheme is the worst performing of all the states, based on assets to liabilities ratio (unfunded liability) and return to work outcomes, yet continues to be the most expensive for businesses in the nation. In reviewing the poor performance of South Australia s workers compensation scheme, Business SA found some alarming results:- > South Australia has the highest rate of injured workers receiving weekly payments (42%); > the average cost per compensation claim is the highest in Australia;

4 OVERVIEW South Australia s business community has long accepted its responsibility to support a scheme that compensates and rehabilitates injured workers, and sees them re-join the workforce as soon as possible. Since 1986, when the Workers Rehabilitation and Compensation Act was introduced in South Australia, workers compensation has been funded solely by employers, through levies to WorkCover, which was established to administer the scheme. Other states of Australia introduced similar workers compensation legislation at the same time, and over the years, have made significant amendments to their respective compensation schemes in line with changing political, economic and business environments. The South Australian Act however, has remained virtually unchanged, and consequently the benefits scheme has become the most generous in the country. At the same time, employer levies have also risen to continue to underpin the scheme s liability to meet estimated claims costs, as well as pay doctors, lawyers and government administration fees. South Australia s workers compensation system is now overdue for reform. Bold change is needed to balance the interests of workers with the need to provide a competitive business environment. Workers Compensation A Program for Reform in South Australia focuses on the changes required to achieve just this outcome. The plan examines the reasons behind the poor performance of South Australia s current workers compensation system, compares and analyses scheme performance between the states, makes the case for both legislative and strategic change, and recommends necessary and responsible reforms. South Australian Workers Compensation Scheme Performance South Australia s workers compensation scheme continues to under-perform, when compared with other schemes and is actually the worst performing in Australia, based on both unfunded liability, or assets to liabilities ratio, and return to work outcomes. Research shows that South Australia has the highest rate of injured workers receiving weekly payments, and the highest average cost per compensation claim. This has created an incentive to stay on the system for longer, so South Australian workers also have the highest number of days of paid compensation. The State has the highest ratio of injured workers who do not return to work in the first six months of their claim. Over the past five years there has also been a steady increase in the number of long-term claims, which are those over three years old. The cost of compensation payments and the amount of time workers spend on the system has a detrimental affect on both the performance of the scheme and the injured worker, who surely benefits most in the longer term by a return to work as soon as possible. Causes of South Australia s poor performance include: > a structure of generous benefits that have created an incentive to stay on the system and not return to work. This is out of step with the rest of Australia; > the lure and likelihood of a redemption payment, or pay out from WorkCover is an incentive for some workers to remain on the system, which in turn increases pressure on continuance rates. (A redemption payment to an injured worker is a lump sum payment, the amount of which is agreed to between WorkCover and the injured worker and represents a discharge of WorkCover s liability to pay weekly payments and/or medical expenses); > the mechanism for getting those workers who have the capacity for employment back to work is ineffectual; South Australian businesses pay an average levy rate of 3%, which is well in excess of levy rates in other states. Further increases in the unfunded liability will make future reductions in levy rates unlikely and create further pressure to increase levy rates. Average levy rates SA NSW Qld Vic WA Tas Average 3.0% 2.17% 1.2% 1.62% 2.13% 2.32% Levy Rates WorkCover Corporation 2006 The nation on a page

5 OVERVIEW All other states have implemented successful major workers compensation reforms over the past five years to ensure the necessary incentives for return to work and reductions in continuance rates. The South Australian Government must recognise the increasingly competitive business environment facing businesses in this state, and the consequent need to both reduce the cost to business and increase the efficiency of the workers compensation regime in South Australia. Businesss SA s Workers Compensation A Program for Reform in South Australia focuses on the changes required to realign South Australia s workers compensation system, and recommends necessary, responsible and achievable legislative and strategic change.

6 RECOMMENDATIONS 5.1 Introduce incremental reductions or step-downs in weekly benefits to employees Cut-off benefit payments to an employee at 104 weeks based on their capacity to work Reduce the maximum weekly benefit payment to each employee to 125% of State average weekly earnings Identify and amend the relevant factors determining the obligation of an employer to provide 17 suitable re-employment. 5.5 Reduce an employer s obligation to provide re-employment from 12 to six months, and increase the threshold 18 number of employees from 10 to 20 to qualify for exemption of the employer s obligation to provide re-employment. 5.6 Reverse the two year review outcomes so that the onus of proof of incapacity rests with the employee Limit employer liability for significant disabilities that are in no way causally related to employment Limit the circumstances in which a disability sustained during the course of a journey is claimable Introduce medical panels to determine an employee s entitlement to lump sum compensation Calculate average weekly earnings as the employee s average earnings (AWEs) over the previous 12 months, 20 including overtime payments Identify employment as the major cause of the stress rather than merely a substantial cause in such claims Change the time limits for compensation claims Develop a framework for the early resolution of disputes Eliminate redemptions. 22

7 History of workers compensation in Australia Before the advent of workers compensation legislation, injured workers could only seek compensation for injuries incurred in the workplace by taking action against their employers for negligence through common law. As well as having to prove that the employer was at fault, court proceedings were time-consuming and costly. These factors prevented many workers from seeking compensation for workplace injury. Towards the end of the 1800s, governments in Europe and the UK recognised the social cost of workplace injury and the need for injured workers to be compensated. In 1897, the English Parliament passed the Workmen s Compensation Act. This new Act provided compensation for loss of earning capacity caused by workplace injury. Australia soon followed England s lead. South Australia became the first Australian state to introduce workers compensation. In 1900, South Australia introduced the Workmen s Compensation Act, which was based on English legislation. In 1932 this Act was amended and in 1971 was replaced by the Workers Compensation Act The Workers Compensation Act 1971 was a complete restructure of the previous workers compensation scheme. Compensation payable to injured workers was increased with weekly benefits becoming more generous and being offered for longer periods of time. In addition, coverage of the Act increased with more and more injuries and diseases becoming compensable. In the 1980s, workers compensation legislation and systems in Australia changed. Workers compensation authorities began to emerge in place of private insurers. These new authorities were given greater powers with more emphasis placed on rehabilitation, return to work and injury prevention. 1.2 Workers compensation in South Australia In 1986, South Australia introduced the Workers Rehabilitation and Compensation Act 1986, after the Byrne Report recommended the creation of a central body that would coordinate injury prevention, rehabilitation, scheme funding and claims management. The introduction of this Act saw the creation of the WorkCover Corporation to oversee a new workers compensation scheme. Unlike the previous legislation, the new workers compensation scheme did not focus solely on monetary compensation to injured workers. The new workers compensation scheme was set up with the following key objectives in mind: > financial compensation in the case of workplace fatality, injury or illness; > the provision of appropriate injury management, consisting of early intervention, rehabilitation and return to work; > ensuring that employer contributions fully covered the cost of scheme liability arising from current employment in an affordable manner. A critical aspect of this new South Australian workers compensation scheme was that it was to be funded solely from employer contributions, i.e. the WorkCover levy. As a consequence, the payment of the WorkCover levy became a significant cost of doing business in South Australia. Average levy rates SA NSW Qld Vic WA Tas Average 3.0% 2.17% 1.2% 1.62% 2.13% 2.32% Levy Rates WorkCover Corporation 2006 The nation on a page

8 Amendments to the Workers Rehabilitation and Compensation Act Unlike other states that introduced similar workers compensation legislation in the 1980s, the South Australian Workers Rehabilitation and Compensation Act has remained substantially unchanged. The most significant changes occurred in 1995 when the South Australian Parliament introduced amendments to reduce escalating costs (in the areas of stress claims and journey accidents) and to improve disputation systems. Amendments at this time included: > reduction in coverage for journey accidents; > the introduction of exclusions to the stress claim provision where the predominant cause of a worker s stress was reasonable action taken in a reasonable manner by the employer; > the introduction of the Workers Compensation Tribunal with its emphasis on early dispute resolution via conciliation. The impact of the 1995 amendments has not been significant. Despite changes in the economic and business environment in South Australia, the deteriorating financial performance of South Australia s compensation scheme and increasing competition for business between the states, there has been no further significant legislative change to the Act. In contrast, New South Wales and Victoria have reacted to the changing political and business environments by making significant changes to their respective workers compensation schemes.

9 2. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME PERFORMANCE The deteriorating performance of South Australia s workers compensation system was recognised several years ago. The two key indicators of performance are: > continuance rates - the number of workers who remain on the workers compensation system and who do not return to work, and > unfunded liability assets to liability ratio. 2.1 Continuance rates In 2004, the newly appointed South Australian WorkCover Board commissioned an operational review. Undertaken by ex-victorian WorkCover CEO, Bill Mountford, this operational review resulted in a report entitled Restoring Claims Management Excellence Final Report May This report identified continuance rates as a significant factor in the South Australian workers compensation scheme s poor performance. The main contributor was found to be the failure of rehabilitation to achieve early and sustained return to work (RTW) outcomes. As the WorkCover Corporation s Annual Report (page 19) states: Two key measures of a scheme s effectiveness and efficiency are the continuance rates of claims and the expense ratios, respectively. On both these measures the South Australian system was found to be significantly lagging the Victorian scheme with which it is most similar. At the scheme strategy level (as set by the Corporation), the strong emphasis on early intervention and rehabilitation has failed to achieve earlier and more sustained return to work rates for injured workers. Income maintenance claims of one year or more duration are associated with 75 per cent of the claims liability. Continuance rates are therefore a key driver of scheme performance. The longer an injured worker stays on the system the greater the cost to the scheme. Publicly available data indicates that continuance rates continue to deteriorate in South Australia, thereby increasing scheme liability. 2.2 Unfunded liability Unfunded liability is a measure of the adequacy of the workers compensation scheme to meet future claims payments. Ratios above 100% indicate that the scheme has more than sufficient assets to meet its predicted future liabilities. Conversely, low ratios could be an indication of the need for a scheme to increase its premium rates to ensure assets are available for future claim payments. (Workplace Relations Ministers Council Comparative Performance Monitoring Report 8 th Edition, September 2006, page 25). Currently, the South Australian workers compensation scheme has sufficient funds to cover 65% of scheme liabilities (WorkCover Corporation Annual Report ). Levy income has increased from $379.4 million in to $494.1 million in (WorkCover Corporation SA Statistical Review Part , Levy Statistics, page 15). Yet as at 30 June 2006 the scheme funding ratio was 65%. (This figure allows for the projected savings on legal costs and has been buoyed by a better than budgeted return on investments.)

10 3. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME COMPARED WITH OTHER STATES A comparison of the South Australian workers compensation scheme with the other state schemes provides additional evidence of the deteriorating position of the South Australian scheme. The comparison also clearly indicates the greater costs facing South Australian employers compared to interstate. > South Australia has a lower durable RTW rate than the Australian average. (The durable RTW rate measures the proportion of injured workers who have returned to work and were still working at the time of interview.) (Appendix F - Figure 2). Appendix A provides an overview of the benefit structure of the South Australian workers compensation scheme compared with the benefits offered interstate for an injured worker totally incapacitated for 120 weeks. Appendix B compares the key features and entitlements of Australian workers compensation schemes as at 11 October 2006 (The Nation on a Page: WorkCover Corporation). 3.1 Length of time injured workers stay on the scheme The Heads of Workers Compensation Authorities commissioned a report that surveyed 2,995 injured workers in Australia and New Zealand workers compensation jurisdictions. Figure : Durable RtW rate (Comparative) Australian rate 76% 100% 90% 81% 75% 75% 78% 80% 70% 70% 60% 50% 40% 30% 20% 10% 86% 85% 62% The following graphs illustrate South Australia s performance (Note: COM refers to the Comcare Scheme for Commonwealth Workers and SEA refers to the Seacare Scheme for maritime workers.) Data from these schemes has been excluded in the examination of South Australia s performance against other states. Key points arising from the Return to Work Monitor Report, August 2005 are: > in , South Australia had the lowest rate of injured workers returning to work within the first six months of their claim. (Appendix F Figure 1). Figure : RtW rate (Comparative) Australian rate 85% 100% 93% 90% 91% 90% 85% 84% 85% 82% 80% 75% 70% 60% 50% 40% 30% 20% 10% NSW VIC QLD SA TAS NT COM SEA > South Australia had the highest rates of injured workers receiving weekly payments 42%. The next highest was Victoria 25%. (Appendix F - Figure 3). Figure : Current compensation status (Comparative) Australian rate 21% 100% 90% 80% 70% 60% 50% 42% 40% 30% 20% 25% 16% 16% 13% 20% 10% NSW 19% 25% VIC QLD SA TAS NT COM SEA NSW VIC QLD SA TAS NT COM SEA

11 3. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME COMPARED WITH OTHER STATES 10 > South Australian workers were more likely to return to work with their pre-injury employers than the national average. (Appendix F - Figure 4). However, they were less likely to return to the same duties than the national average. Figure : Return to same employer (Comparative) Australian rate 84% 100% 90% 82% 87% 81% 89% 85% 77% 80% 70% 60% 50% 40% 30% 20% 10% NSW 93% > South Australia s partial RTW rate was the highest in Australia. (Appendix F Figure 5). 19% 93% VIC QLD SA TAS NT COM SEA Figure : Partial RtW rate at RtW (Comparative) Australian rate 23% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 26% 22% 38% 31% 24% 22% 2% > South Australian workers were less likely to return to work on their previous hours. (Appendix F - Figure 6). Figure : Returned to previous hours (Comparative) Australian rate 54% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% > South Australian workers had the highest mean number of days compensation paid. (Appendix F Figure 7). Figure : Mean number of days compensation paid (page 53) (Comparative) Australian mean 56 days % NSW 54 NSW 51% 60 56% 55 37% 64 51% 40 60% 47 37% 51 85% VIC QLD SA TAS NT COM SEA VIC QLD SA TAS NT COM SEA NSW VIC QLD SA TAS NT COM SEA

12 3. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME COMPARED WITH OTHER STATES > South Australia had Australia s highest average cost per claim. (Appendix F Figure 8). Figure : Mean claim cost (Comparative) Australian mean $10,594 $25,000 $20,000 $15,000 $10,000 $5,000 $11,118 NSW $9,535 $9,907 $12,069 $10,346 $11,807 $14,364 $23,827 VIC QLD SA TAS NT COM SEA 3.2 Rehabilitation and return to work The South Australian workers compensation scheme is the worst performing of all of the states, based on the assets to liabilities ratio (unfunded liability) and RTW outcomes. An analysis of comparative data indicates that: > there is a significant risk that South Australia s continuance rates will continue to deteriorate, leading to a worsening of the overall scheme performance; > South Australia has the highest number of workers that make a partial return to work only, while on average, South Australian workers stay in the system longer than interstate workers. Disputation rates in the Workers Compensation Tribunal are going down while continuance rates and scheme liability continue to go up. 3.3 Comparison of weekly payments between the states In all Australian jurisdictions, the payment of weekly benefits to injured workers is based on a percentage of the worker s pre-injury earnings. Each state workers compensation scheme provides varying levels of weekly benefits. Variations in the weekly payments depend upon the amount the worker earned in their pre-injury employment and the percentage of the pre-injury earnings that the individual state scheme allows. Workers with the same pre-injury earnings and the same level of incapacity will receive different weekly payments from state to state because of the differing percentages of pre-injury earnings payable under the different state schemes. Weekly payments will also vary depending upon the number of weeks since the injury. In some states, weekly payments cease once a worker has reached the scheme cap. This means there is no level playing field when it comes to the weekly compensation payments from state to state. To compare South Australia with other jurisdictions, consideration must be given to the different benefit structures and the limitations that apply in each state. Since the various state schemes all have different methods of calculating weekly payments, it is necessary to consider the different scenarios for workers with low, medium and high earnings. 11

13 3. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME COMPARED WITH OTHER STATES 12 Information in the table below has been extracted from the Workplace Relations Ministers Council Comparative Performance Monitoring Report 8th Edition, September Percentage of pre-injury earnings paid as weekly payments (as at 1 January 2005) Pre-injury earnings Comcare NSW Vic Qld WA SA Tas $ % 100% 78% 99% 100% 89% 86% $1, % 61% 67% 69% 86% 89% 86% $2, % 37% 49% 69% 69% 86% 86% Percentage of Pre-Injury Earnings (PIE) for full period of incapacity (120 weeks) for a totally incapacitated worker with dependant spouse and two children. Information in the table below has been extracted from the report of the Heads of Workers Compensation Authorities entitled Comparison of Workers Compensation Arrangements Australia and New Zealand November 2005 page 20 & 21. The current figures have been taken from the relevant compensating authority websites. Benefit Caps Comcare NSW Qld SA Tas Vic WA Maximum Weekly Payment $1, (150% of average week ordinary time earnings for full time adults as published by ABS) < 26 weeks - $1, > 26 weeks - $ dependants: Spouse; $ child; $ children; $ children; $ children; $ for each additional dependant child in excess of 4; $96.50 (As at 1 October 2005) (Currently maximum $1, and after 26 weeks - $347.90) < 26 weeks; Workers under industrial instrument the greater of: (a) 85% of the worker s normal weekly earnings (NWE) or (b) amount payable under the worker s Award or agreement. Workers not under industrial instrument, the greater of: (a) 85% of NWE (b) 70% of QOTE. QOTE (Queensland Ordinary Time Earnings) at 1 July 2005 is $ (As at 1 October 2005) (Currently QOTE = $969.50) 2 x State Average Weekly Earnings maximum - $1, (as at 1 October 2005) (Currently $ ) <13 weeks 100% of normal weekly earnings > 13 weeks 85% of weekly payment > 78 weeks 80% (entitlement to weekly payment ceases on the expiration of 9 years after the date of the incapacity) $1, (As at 1 October 2005) (Currently $1, $ maximum for partially incapacitated workers) $1, (As at 1 October 2005) (Currently $1, The maximum total amount payable in weekly payments and lump sum settlements = $145, current until 30 June 2006)

14 3. SOUTH AUSTRALIAN WORKERS COMPENSATION SCHEME COMPARED WITH OTHER STATES Apart from the low income scenario (where New South Wales scheme provides 100%, Comcare 94% and Queensland 99%), the South Australian scheme provides the highest level of benefits as a percentage of pre-injury earnings to injured workers across the three scenarios. 13 South Australia provides significantly higher benefits over the various income ranges than New South Wales, Victoria, Queensland and Tasmania. South Australia has no benefit cut-off based on either the lapse of time or quantum of benefits, whereas Queensland, Tasmania and Western Australia have benefit cut-offs based either on number of weeks or quantum of benefits. Under the Victorian scheme, a medical practitioner reviews workers entitlements before 104 weeks of incapacity. If the medical prognosis at the time is that the worker is likely to be able to return to work in the near future, then entitlements to weekly benefits cease at 104 weeks. In Western Australia the prescribed maximum amount for weekly benefits ($139,995) is exhausted after 111 weeks of compensation. After this time, a further amount of $50,000 could be approved if there were exceptional circumstances. 3.4 Comparison - benefit caps between states There is a significant differential in benefit caps between South Australia and the other states. Under the South Australian scheme, the benefit cap is set at 200% of pre-injury earnings ($2,025.40). In Victoria the benefit cap is set at $1,190. In their submissions to the Productivity Commission s inquiry into workers compensation schemes, Institute of Actuaries Australia recommended benefit caps be set at 150% of pre-injury earnings. (From Submissions of Institute of Actuaries of Australia). 3.5 Comparison - levy rates between states The South Australian scheme has the highest average levy rate of all the state schemes. Average levy rates SA NSW Qld Vic WA Tas Average 3.0% 2.17% 1.2% 1.62% 2.13% 2.32% Levy Rates WorkCover Corporation 2006 The nation on a page

15 4. THE CASE FOR CHANGE 14 The comparative analysis of the South Australian workers compensation scheme s performance with that of the other states, signals a need for major legislative and strategic reform. Reforms are urgently required to achieve a scheme that is both affordable to the employer community, and one that provides an appropriate level of coverage for injured workers. 4.1 Workers compensation culture The culture of workers compensation in South Australia has built up over a long period of time. Workers, and more importantly their representatives, are aware of the difficulty of removing a worker from the system. As a result, even a minor injury has the potential to create a significant liability under the South Australian workers compensation scheme. Disputation rates in the Workers Compensation Tribunal are going down and continuance rates are going up. Workers with capacity for work are under little pressure to get off the system. The Act contains provisions that allow the entitlement to weekly payments to be reviewed in order to determine if there is a basis upon which payments can be reduced or discontinued, at or after, the second year anniversary of a claim. These reviews are not assisting to achieve the desired return to work outcomes. 4.2 Rehabilitation and return to work Enforcement of the employer s obligation to provide suitable employment is a critical tool to reducing scheme liability. RTW data indicates that despite high numbers of partial returns to work, there is an unacceptably high percentage of workers on modified/alternative duties. This indicates a failure to properly assess the sustainability of return to work and also may reflect the employer s reluctance to provide real employment as opposed to rehabilitation/alternative duties. 4.3 Use of redemptions (waiting for the lump sum payout) The use of redemptions creates a lump sum culture. This culture creates an incentive for workers to stay on the system, leading to poor continuance rates. (See Appendix C - AM Actuaries Redemption & Scheme Funding for an analysis of the problem with redemptions.) 4.4 Failure of the second year review provisions The utility of the second year review provisions (Section 35(2)(c)) must be called into question. While the Workers Compensation Tribunal has, in a number of cases, held the second year review provisions to be effective in reducing or discontinuing weekly payments at the second year anniversary of a claim, the evidentiary requirements of the provision have created a difficulty for the system. The assessment of a worker s capacity for suitable employment is a critical part of the return to work process. 4.5 Reforms in other states Unlike South Australia, Queensland, New South Wales and Victoria, have significantly changed the structure of their workers compensation schemes in response to an increasingly competitive business environment and to ensure scheme viability. The Victorian Government, in its budget, announced a further cut in workers compensation premiums by 10% to 1.62% of employer payroll, effective from 1 July In its media release, the Victorian Government stated that the cut demonstrated the State Government s commitment to helping Victorian business keep costs down and help them retain a competitive advantage; the new average rate is 25% lower than in New South Wales and 46% lower than in South Australia. The Victorian Government emphasised in their budget announcement the importance of levy/premium rates to the competitiveness of Victorian business. 4.6 Harmonisation of workers compensation schemes between the states In 2004, the Productivity Commission published its report on the viability of a national workers compensation framework that would involve the introduction of uniform laws governing workers compensation across Australia. More recently, the New South Wales and Victorian Governments have announced plans to harmonise workers compensation laws and administration between the two states in an endeavour to make the legislative and administrative requirements for employers between the two states more seamless.

16 4. THE CASE FOR CHANGE The harmonisation scheme is said to include the introduction of common payments forms for compensation claims, common payment dates and shared advertising campaigns. 15 The move to harmonise the New South Wales and Victorian schemes is likely to place pressure on other states to follow suit. Reforms are urgently required to bring South Australia into line with the other states that have embarked upon major reforms over the past five or so years.

17 5. REFORM IS REQUIRED 16 The reforms presented below recognise the increasingly competitive business environment, changes in the economic configuration of South Australia and the building momentum at both the federal and state level for uniformity and harmonisation of workers compensation laws across Australia. The rationale behind the restructuring of benefits by introducing step-downs, caps and cut-offs is: > firstly to allow for a net reduction in the amount of compensation paid; > secondly to create the necessary incentive for return to work and the reduction in continuance rates. 5.1 Introduce incremental reductions or step-downs in weekly benefits to employees Section 35 currently provides the statutory formula for the calculation of a worker s entitlement to weekly payment. Section 35 must be amended to change the step-down in weekly payments from 100% of average pre-injury earnings from 0-52 weeks and 80% from 53 plus weeks to the following: > 0-13 weeks weekly payments equal to 95% of average pre-injury earnings for total incapacity (95% of the difference between average weekly earnings (AWE) and actual earnings for a partially incapacitated worker). > weeks weekly payments equal to 75% of average earnings for total incapacity (75% of the difference between AWE and actual earnings for a partially incapacitated worker). The structure of benefits is important to scheme viability as well as providing incentive to return to work. A change to benefit structure including the introduction of new step-downs in weekly payments, would provide greater incentive for return to work, reduce continuance rates and, at the same time, provide an adequate level of income support for injured workers. The current scheme provides a worker with 100% of pre-injury earnings for the first 52 weeks of incapacity and then one step-down to 80% of pre-injury earnings for the remainder of the claim. Weekly payments can continue until a worker reaches 65 years of age. In other states, such as New South Wales and Victoria, there has been recognition of the need to establish an affordable scheme, while at the same time, ensuring that sufficient incentive exists to return to work. The current South Australian scheme provides very little incentive for an injured worker to return to work and is out of step with the other state schemes. Maintaining workers on 100% of pre-injury earnings may create an incentive to remain on the system. The greater the number of workers receiving weekly payments and the longer they remain on the system, the higher the cost to employers and to the community. Period payments, which are closely linked to pre-injury earnings, may reduce incentives to return to work. The level of benefits, conditions of access and the matter in which the benefit is paid (period of lump sum) all provide incentives for particular forms of behaviour. (Productivity Commission Enquiry Report No March 2004) In South Australia, workers receiving weekly payments for more than one year are associated with 75% of overall claims liability (WorkCover Annual Report page 19). The timing and quantum of benefit step-downs can not only have a significant impact on scheme liability, but also create a greater incentive to return to work. 5.2 Cut-off benefit payments to an employee at 104 weeks based on their capacity to work. The current scheme provides for workers to continue to receive weekly payments based on 80% of the difference between average and actual earnings to age 65 years. Section 35 must be amended to remove the entitlement to ongoing weekly payments beyond 104 weeks save and except where a worker has a 30% whole of body impairment and has no capacity for work (onus of proof on worker to prove he/she has an ongoing entitlement). The benefit threshold of 104 weeks should be based on the capacity to work (e.g. 30% whole body impairment). From the experience of other jurisdictions, indications are that 35-55% of claimants will not pass the 104-week impairment threshold.

18 5. REFORM IS REQUIRED Evidence that the timing of the changes in benefit levels are... significant in determining duration. In both workers compensation and social security schemes, high exit rates by beneficiaries are typical just prior to the time at which benefits are significantly reduced. (Sloan and Kennedy 1993, page 16) (Productivity Commission Inquiry Report No.27, 6 March 2004, submission 156, page 2) In order to reduce scheme liability in line with other states, and to increase incentives to return to work (and reduce continuance rates), there must be a change in benefit threshold post 104 weeks. Unlike other states, which have either an overall limit on the amount that a worker can receive or a threshold based on their capacity to work (e.g. Victoria). In South Australia weekly payments continue to be paid at 80% of pre-injury earnings until age 65. The so-called second year review provisions are too cumbersome for effective implementation across the scheme. South Australia cannot afford to have a scheme where benefits are paid indefinitely. Other states have recognised that in order to maintain a viable scheme, weekly payments must end at an appropriate time. 5.3 Reduce the maximum weekly benefit payment to each employee to 125% of State average weekly earnings Section 4 currently provides a maximum weekly payment of income maintenance based on 200% of state average weekly earnings. Section 4 must be amended to reduce the maximum weekly payment cap to 125% of state average weekly earnings. The benefit cap represents the maximum percentage of pre-injury earnings that an injured worker can receive as a weekly payment. Benefit caps place an upper limit on scheme liability and are intended to encourage injured employees to return to work. The current South Australian scheme benefit cap is 200% of the state average earnings figure, making it the highest cap among the states. Lowering the benefit cap from 200% of state average weekly earnings will bring South Australia into line with the other states and place an upper limit on scheme liability. This will increase incentives for return to work and help reduce continuance rates. Impact of legislative reform to benefit structure in South Australia AM Actuaries Pty Ltd undertook modelling of these proposed legislative changes to the South Australian workers compensation scheme. (refer to Appendix D and E). Its analysis indicated that if the reforms are implemented, the savings will be in the order of $117 million to $192 million per annum, or from 0.63% to 1.07% in levy rate terms. Legislative reform in the area of benefit structure is integral to maintaining South Australia s competitiveness with other states. (Further modelling of proposed legislative packages are shown in Appendix E. All estimates are indicative only refer to Appendices D & E for an explanation of the modelling process and its limitations.) 5.4 Identify and amend the relevant factors determining the obligation of an employer to provide suitable re-employment Section 58B creates an obligation on a pre-injury employer to provide suitable employment to an injured worker. Section 58B must be amended to include a list of relevant factors that the compensating authority must take into account in determining whether it is 'reasonably practicable' for the pre-injury employer to provide suitable employment in any given circumstance. Prescribed relevant factors should include: > the size and structure of the pre-injury employer s business; > the number of employees; > the financial hardship to the business in providing suitable employment.; > the capacity of the employer to provide sustainable employment that is productive to the employer s business. Relevant factors set out in s35(2) should also be relevant factors under s58b. 17

19 5. REFORM IS REQUIRED 18 Clearly, there needs to be a strong focus on rehabilitation and return to work, in order to reduce continuance rates. Section 58B(2) provides various exceptions to the employer s duty to provide work. The main exception to the obligation to provide work is where it is not reasonably practicable to provide suitable employment. This provision creates uncertainty as to what factors can and should be considered in determining what is 'reasonably practicable' in any given case. In Longyear Australia Pty Ltd v Workers Rehabilitation and Compensation Corporation No. SCGRG 94/1494 Judgment No. 4951, the court said: The primary obligation is to provide suitable employment. If unqualified, that obligation would undoubtedly require the creation of a position if no suitable vacancy existed. It seems to me that whether the qualification of reasonable practicability relieves the employer of the obligation to create a position must depend upon the circumstances. The concept of reasonable practicability cannot be confined as proposed by the plaintiff. In a small business with a small staff and limited financial resources, the creation of a position may not be reasonably practicable. In a larger organisation, there may be little or no difficulty in finding appropriate tasks for the disabled employee. The effect on casual hours or the employment of others are factors to be considered having regard to the circumstances of the case. Whether a particular course is reasonably practicable is a question of fact and degree to be determined in a matter arising under section 67 by the Board or its delegate. No doubt a judgment of the Board might be so beyond the limits of reason as to indicate that it had misunderstood the section and the concept of reasonably practicability embodied in it, but, subject to the limits of reason, the judgment as to whether it was reasonably practicable to provide suitable employment is to be made, on review, by the Board. The decision of Longyear provides little real guidance on what is reasonably practicable in a particular case. Pre-injury employers have little or no idea when their obligation begins and/or ends. Usually, it is not until the WorkCover Corporation imposes a supplementary levy for failure to provide suitable employment (Section 67) that a pre-injury employer advocates for release from the obligation. By and large, the potential for the imposition of a supplementary levy causes most employers to grudgingly comply with the requirement that suitable employment be provided. This is despite the fact that in a large number of cases: > employment provided is not employment under a contract of service as required by s58b; > part-time alternative duties are provided instead of full-time sustainable employment; > there is little prospect for these duties to lead to a durable return to work. A more robust process of identifying suitable employment is needed. This includes the need for greater certainty as to the relevant factors to be taken into account in determining whether the pre-injury employer could and/or should provide employment. This is likely to lead to a more durable return to work rate. 5.5 Reduce an employer s obligation to provide re-employment from 12 to six months, and increase the threshold number of employees from 10 to 20 to qualify for exemption of the employer s obligation to provide re-employment Section 58B must be amended to reduce the time period for the obligation to make suitable employment available for a small employer from 12 months to six months and The threshold number of employees should be increased from 10 to 20, so that a greater number of small businesses can qualify for the exception. Small employers lack the necessary infrastructure and overall capacity to provide suitable employment. There is anecdotal evidence to suggest that attempting to return injured workers to alternative work with a small employer is likely to be unsuccessful, thereby increasing continuance rates. Section 58B(2)(e) allows employers with less than 10 employees to be released from their section 58B obligation after a worker has been incapacitated for work for 12 months. It is questionable whether employers with less than 20 employees would be in any better position to offer suitable employment.

20 5. REFORM IS REQUIRED Such an amendment would remove the financial hardship from small employers who struggle to find alternative employment for injured workers while at the same time allowing for the re-training and re-deployment of the injured worker with a different employer that offers a more durable return to work. 5.6 Reverse the two year review outcomes so that the onus of proof of incapacity rests with the employee This amendment is proposed as an alternative to a benefit cut-off based on a fixed level of impairment referred to above. Section 35(2)(c) should be amended to reverse the onus of proof so that the worker must prove total incapacity for work in order to remain in receipt of payments. Reversing the onus of proving capacity for work and employability would significantly erode a worker s ability to hang on to the system where there is no case for a continuation of benefits. This reform would compliment the removal of redemptions as a tool for discontinuance. Second year review provisions allow for review of weekly payments based on capacity for work. The purpose of the two year review provisions is to reduce or discontinue weekly payments based on capacity to work, even if actual employment is not available. The onus of proof rests with the compensating authority. Disputation rates in the WorkCover Tribunal continue to decrease while continuance rates increase. Workers with capacity for work are under no pressure to get off the system. The Act contains provisions that allow weekly payments to be reduced or discontinued at the two year anniversary of a claim. The proposed amendments would make it easier for case managers to implement the review process, with the onus on the worker to establish an entitlement to remain on the system. 5.7 Limit employer liability for significant disabilities that are in no way causally related to employment Section 30 sets out the circumstances in which a disability is work-related. To avoid liability for significant disabilities that are in no way causally related to employment, Section 30 must be amended to require a causal link between the disability and the employment. Currently, a disability is compensable if it arises from employment (Section 30(1)). > in the case of a disability that is not a secondary disability or a disease, the disability is compensable if it arises out of employment (employment is a real cause of the disability) or the disability occurs in the course of employment ; > a disability in the nature of a secondary disability or a disease, can only be compensable if there is a causal nexus/link between employment and the disability or the disability occurs during the course of employment and employment contributed to the disability. The level of contribution is irrelevant. In New South Wales and Victoria, workers compensation legislation has been amended so that a worker must always prove a causal nexus between employment and the disability. In South Australia, in the case of a disability that is not an aggravation, exacerbation, deterioration or worsening of a pre-existing disability (secondary disability), no work cause for the disability is necessary where the disability arose while the worker was in the course of employment. The jurisdictions in New South Wales and Victoria were prompted to amend the legislation after a number of cases, most notably Darrin Zickar v MGH Plastic Industries Pty Limited [1996] HCA 31 and Kennedy Cleaning Services Pty Limited v Petkoska [2000] HCA 45. In both those cases, the workers had suffered a cerebral haemorrhage at the place of employment. The cerebral haemorrhage was to be an injury that occurred during the course of employment, and was therefore compensable even though the worker could not demonstrate any causal link between the disability and the employment. 19

21 5. REFORM IS REQUIRED 20 In South Australia, much turns on whether a disability is or is not a secondary disability in order to determine whether the test of causation applies or not. 5.8 Limit the circumstances in which a disability sustained during the course of a journey is claimable Section 30(5) sets out the circumstances in which a disability sustained in the course of a journey will be compensable. Section 30(5) must be amended to set out more clearly the South Australian Parliament s intention as to when disabilities that occur during the course of a journey are compensable. Section 30(5) must also be amended to include a definition of journey for the purposes of the subsection. Section 30(5)(a) provides that a disability that arises out of, or in the course of a journey, arises from employment only if the journey is undertaken in the course of carrying out duties of employment. The legal test of carrying out duties of employment has been interpreted so broadly by the Workers Compensation Tribunal as to make it almost indistinguishable from the supposedly broader test of in the course of employment that applies to non-journey claims. The courts interpretation of section 30(5) appears to be at odds with Parliament s intention in enacting section 30(5) in Namely, to limit the circumstances in which a disability sustained during the course of a journey is compensable. The difficulty in the interpretation of the section has given rise to a significant number of disputes that could have been avoided if Parliament s intention had been expressed more clearly in the wording of the section (see for example the case of Rapson v WorkCover [2005] SAWCT 105). 5.9 Introduce medical panels to determine an employee s entitlement to lump sum compensation Section 43 provides the basis for a worker s entitlement to lump sum compensation where the worker suffers from a permanent residual disability. Amend the Act to provide for the use of medical panels in certain circumstances. Section 43 disputes occupy approximately 21% of all disputes in the Tribunal (WorkCover SA Annual Report). The dispute resolution process encourages the parties to engage in doctor shopping for a favourable medical opinion. In almost all cases, medical experts commissioned by the worker and the compensating authority provide assessments on the extent of a worker s permanent residual disability that represent the high and low ends in quantitative terms, respectively. The dispute resolution process is such that workers really have nothing to lose by disputing the compensating authorities assessment of residual disability under Section 43, in the hope of negotiating a higher assessment and consequently a higher payment. This probably explains the elevated number of Section 43 disputes in comparison with very low numbers of those disputes that actually reach a contested hearing. In the vast majority of cases, the parties agree on a midpoint between the various assessments. The process of obtaining a binding assessment could be reduced by the use of medical panels Calculate average weekly earnings (AWEs) as the employee s average earnings over the previous 12 months, including overtime payments Section 4 currently allows a worker to argue that past earnings are not necessarily relevant to the determination of what the worker would have earned for a week s work had he or she not been injured. Section 4 must be amended to provide that AWEs be based on a worker s average earnings over the previous 12 months (including overtime payments). Section 4 must be amended to allow a worker s average overtime earnings over the previous 12 months to be included in the calculation of AWEs. Such an amendment would significantly reduce the number of disputes in the Tribunal. Approximately 19% of all disputes in the Workers Compensation Tribunal (WorkCover SA Annual Report) relate to the calculation of AWEs. An amendment to introduce a broad averaging of past earnings process would significantly reduce the number of disputes and lead to greater efficiencies in the claims management process.