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Employees who are out of work due to work injuries or illnesses are eligible for temporary disability benefits at a rate of 70% of wages subject to an annual maximum. In 2018 that maximum is $903 per week. That means that the employee who earns $2,000 per week or even $20,000 per week is limited to $903 per week in temporary disability benefits. But a substantial number of New Jersey employees – particularly public sector employees – receive full salary during their period of work absences and are not limited to the annual maximum.
There are two categories of full salary employees: those who receive full salary by statute and those who receive full salary by collective bargaining agreement. The difference is significant and is important to understand.
Full Salary By Statute
One very large group of New Jersey employees receives full salary by statute – employees of boards of education. Under N.J.S.A. 18A:30-2.1, a board of education employee receives full salary for one year from the date of injury. So an experienced teacher, for example, earning $1,800 per week receives full salary for up to one year from the date of injury. Here is the part that is not well known: that teacher also has no state or federal taxes taken out of the paycheck! Clearly, that was not the intention of the New Jersey legislature in passing this statute. The IRS, however, has issued opinions that have resulted in a windfall to education employees such that they actually earn substantially more than they did while working.
How did this happen? The explanation is really quite simple. Workers’ Compensation laws are not taxed. The IRS interprets N.J.S.A. 18A:30-2.1 as a workers’ compensation law because it is a statute passed by the legislature. The law provides full salary compensation to those education employees who are injured at work for one year. The IRS therefore concludes that the entire full salary payment is not taxable. What is the result? Board of education employees keep virtually their whole paycheck while out on workers’ compensation absences up to one year, making more than they did while working.
Full Salary By Collective Bargaining Agreement
The other large category of employees which receives full salary does so by collective bargaining agreement, including those in the public or private sector. These agreements are negotiated ones between union and management. In the public sector, virtually all public safety workers, i.e., police, fire, EMT, receive full salary by collective bargaining agreement. In some towns all municipal employees are covered by such agreements. In the private sector, there are also comparable negotiated agreements. The same principle applies: the police officer earning $2,000 per week receives full salary by negotiated agreement but the employee must pay state and federal taxes from his or her paycheck.
Why the difference? Because a negotiated agreement is not the equivalent of a law. It is simply a written agreement between parties. Therefore when the police officer earning $2,000 per week is out on workers’ compensation, all the same deductions come out of the paycheck.
The IRS would be more receptive to not taxing the entire full salary payment of a public safety employee if the municipality passed an ordinance, and the elected officials voted on it, as opposed to simply negotiating a collective bargaining agreement.
There are generally time limits for full salary under both scenarios. Under Title 18A the full salary period ends at one year. After that the third party administrator or carrier pays temporary disability benefits directly to the employee subject to the $903 maximum rate. The same is true of most collective bargaining agreements. Most public sector employers provide some limitation to the full salary period, perhaps six months or a year, but a good number remain unlimited, ending only at maximal medical improvement or return to work.
When an employee who was receiving full salary is reduced to the maximum rate of $903 per week for a 2018 injury, he or she may request that the employer allow supplementation of workers’ compensation benefits with accrued leave – sick time, vacation time, or personal days. This is discretionary on the part of the employer, unless the collective bargaining agreement addresses the issue. The FMLA does permit substitution of paid leave for those on workers’ compensation, but employees who have been out for a year are not eligible for FMLA since they cannot satisfy the requirement of having worked 1250 hours in the prior year.
The interesting question is what does an employer pay to an employee who is receiving full salary? Is the police officer who is receiving $2,000 per week while out of work receiving workers’ compensation benefits? Not really. The officer is receiving something substantially better than workers’ compensation benefits. He or she is getting full salary payments in lieu of workers’ compensation benefits. That is part of the negotiation.
Some public employees have argued that the workers’ compensation portion of their check (for example $903 of the $2,000 paycheck) should be tax free, but that would result in a windfall to the employee. Our hypothetical police officer would be getting $903 tax free on top of $1,100 approximately taxable. Viewed properly, the full salary employee is not getting workers’ compensation at all. The 70% temporary disability check goes to the employer from the third party administrator or carrier as a partial reimbursement for the full salary check.
John H. Geaney, Esq., is an Executive Committee Member and a Shareholder in Capehart Scatchard's Workers’ Compensation Group. Mr. Geaney concentrates his practice in the representation of employers, self-insured companies, third-party administrators, and insurance carriers in workers’ compensation, the Americans with Disabilities Act and Family and Medical Leave Act. Should you have any questions or would like more information, please contact Mr. Geaney at 856.914.2063 or by e‑mail at firstname.lastname@example.org.