Friday, July 10, 2015

Proper Calculation of Interest Payable in the PA Work Comp Award

Interest is due on all unpaid workers compensation indemnity wage loss benefits. Section 406.1 (a) of the Pennsylvania Workers Compensation Act states that "interest shall accrue on all due and unpaid compensation at the rate of ten (10) percentum per annum".

It seems that every few years a question arises as to how this interest payment is to be calculated.
Is it a "simple interest" calculation?
Is it a "compound interest" calculation?
Section 406.1(a) is silent on this point.

As we celebrate the 100th anniversary of the enactment of the Pennsylvania Workers' Compensation Act ... one might ask ...
Why is there still a question regarding such a simple (no pun intended) aspect of workers compensation law?

The "mature" members of the workers' compensation community will recall that in the past, the Bureau of Workers' Compensation would provide one with an interest calculation.
Initially this request was accomplished via a telephone call with a real person.
Later this was accomplished via visit to the Bureau website and use of the "interest calculator".
A rather simple process.

At some point it time this interest calculator was removed. Urban legend has it, that claimant attorneys complained (of course!). It was argued that the Bureau should not provide an interest calculation, as an "official" calculation, where the Act was silent on a calculation method.
The Bureau explanation was somewhat of a non-sequitur, stating the parties " should select their own interest calculation method based upon the facts of each individual workers' compensation case". 
I don't find that very helpful, do you?

NOW, we have another appellate case law precedent that determines the interest due on unpaid workers' compensation benefits is SIMPLE interest, it is not COMPOUND interest.
See the decision of a panel of the Commonwealth Court of Pennsylvania at: Tobler v WCAB (Verizon Pennsylvania, Inc.), No. 2211 C.D. 2014 authored by Judge Simpson on July 9, 2015.

Factual and Procedural Background

The Employee Penalty petition litigation was limited to the issue of the proper calculation and payment of statutory interest on reinstated indemnity wage loss benefits.

In prior litigation, the Employee established entitlement to reinstatement of total disability benefits. Initially, the WCJ decision and order directed reinstatement of indemnity wage loss benefits as of March 2, 2005.  After  appellate review this reinstatement date was revised to November 21, 2002.
[prior unreported decision is at: same case caption, filed March 30, 2011.]

In May 2012, Employer issued payment of the reinstated total disability benefits, commencing as of the November 21, 2002 date. The payment of $117,278.74, represented compensation due plus interest.

Employee filed a penalty petition, asserting entitlement to the payment of interest, calculated by a compound interest method, which would result in a total payment of $139,929.39.

WCJ & WCAB & Commonwealth Court Decisions

The penalty petition was denied by the WCJ.
There was no penalty, as simple interest was payable to Employee, not compound interest.

The Commonwealth Court referenced the authorities cited in the WCJ and WCAB opinions.
WCJ Rago cited several early decisions of the Pennsylvania Superior Court.

The 1936 Superior Court decision at Kessler v. North Side Packing Co. explained that prior to a 1927 amendment, the Pennsylvania Workers' Compensation Act did not specifically provide for interest payment on past due compensation. The 1936 Superior Court decision at Petrulo v. O'Herron Co., determined that the Commonwealth general interest statute applied, even to work comp cases before the 1927 amendment, such that claimant's were entitled to payment of simple interest at six (6) percent. [In 1972 the interest rate was raised to ten (10) percent].

Employee argued to the WCAB that interest is consider additional compensation to the worker.
Interest is not to be considered a penalty against the employer.
Employee reasoned:
Section 406.1(a) requires that interest "accrue" on all due and unpaid compensation.
Interest gained is unpaid compensation.
Therefore that compensation should also accrue interest.
Employee argued he should have been awarded compound interest from the date each weekly payment became due.
This is the "interest upon interest" argument.

WCAB reasoning was that interest has been treated different from compensation in the Act.
Section 406.1(a) does not specify "simple" or compound" interest.
The Pennsylvania Supreme Court has held that compound interest is not favored in the law.
Also, the General Interest Act, section 202 reference to the "legal rate of interest" has been construed to refer mean simple interest. Citing Carroll v. City of Philadelphia Board of Pensions & Retirement Municipal Pension Fund, 735 A.2d 141 (Pa. Cmwlth. 1999).

The Commonwealth Court reasoning rejected the arguments of Employee and the amicus curiae brief of the Pennsylvania Association for Justice. 

Employee argued interest gained on unpaid indemnity wage loss benefits must be considered unpaid compensation and therefore it should accrue interest. Employee argued that 406.1 is designed to put the parties in the position they would have occupied had benefits been paid when they were due. This requires the payment of benefits with compound interest. Base upon economic realities, compound interest is necessary to fully compensate injured workers. Citing the 1998 WCAB decision at Bernotas v PECO Energy Co.

Commonwealth Court reviewed the 1936 cases and statutory language at Section 406.1(a).
The work comp statute does not specify whether interest is simple of compound.

Significantly, the use of compound interest was determined to be permitted only where the parties provide for it in an agreement or a statute expressly authorizes it. In Powell v. County Retirement Board, 246 A.2d 110 (Pa. 1968) the Pennsylvania Supreme Court directed the trial court to use simple rather than compound interest in calculating the amount of an award.

The Pennsylvania Supreme Court in PSEA  v. Appalachia Intermediate Unit 08,  476 A.2d 360 (Pa. 1984) determined that a labor arbitrator lacked the authority to award compound interest where there was no contractual or statutory authority for compound interest. [See also: Ralph Myers Contracting Corp. v. Department of Transportation, 436 A.2d 612 (Pa. 1981) for the proposition: absent any contractual or statutory authority providing for compound interest, a contractor was entitled to receive simple interest on the unpaid balance of an award.].

The "legal rate of interest" cases were reviewed and cited for the proposition that simple interest is soundly favored over compound interest. "...the legal rate of interest is simple and may not be compounded". Carroll, 735 A.2d at 146-47.

Consequently, in light of the longstanding judicial policy disfavoring the awarding of compound interest absent explicit statutory authority providing for it, we must conclude there is no proper authority for an award of compound interest under Section 406.1 of the Act".
 see: slip opinion at page 14.


1.   Confirm with all of your workers' compensation insurance claims representatives that statutory interest calculations on unpaid compensation must be made with a simple interest calculation.

2.   The request for payment of compound interest is a recurring request in my litigated cases. 

NOW, we have a recent clear opinion that specifically considers and rejects claimant's arguments ... including the ubiquitous statement "the Act must be liberally construed to effectuate its humanitarian objectives".

3.   IMO the claimant request for payment of compound interest renders the Employer litigation to be "reasonable", so as to contest a valid legal issue. 

4.   IMO we will continue to see the claimant demand for the payment of compound interest, in a continued concerted effort to effectively revise this section of the Act, in the absence of amendment. 

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