Perverse Outcomes: Notes From the Field on How Financial Incentives in Ontario's Workers’ Compensation System Cause Harm to a Public Institution and Create a New Occupational Hazard

Abstract

An examination by a community legal worker in Ontario, Canada, of the premises of the experience rating system introduced into the Ontario Workers Compensation system and its negative effects on injured workers and their families, on the workers compensation system itself, and on occupational health and safety.

“A woman called in to-day due to difficulties with her compensation claim. She works at a jam factory, and she was burnt by 180-degree jam spewing out of the machine. She took photos of her burn. The company is calling her every day to pressure her to return to work right away. In response to her claim to the compensation board, the company has told the Board it was a sunburn. She is being denied benefits.” ¹

Over my 40 years working at a Toronto legal aid clinic serving injured workers, I have observed a dramatic shift in how workers fared after an occupational injury or illness. The workers’ compensation system in Ontario was never perfect. Far from it. However, there was a fundamental understanding that the system was intended to assist the injured worker. It was there to cushion, and hopefully prevent, mental and financial stress to the worker and their family.

And Then Something Changed

In the 1990s, we began to receive more and more calls at the clinic like the jam-burnt woman's call. We noticed that employers were pressuring workers to not put in a claim or take time off work; offering cots in the workplace for the worker to lie down if necessary. We heard increasing anecdotal evidence that workplaces were full of injured workers placed in nonproductive jobs such as “greeter,” “paper shredder,” and “gate monitor.” We noticed that employers began challenging claims and turning up at appeal hearings with professional representatives to argue that the worker should not receive benefits. This was new.

Employers also began to use private investigators to surveil workers on benefits. At first, their video recordings were considered inadmissible as evidence at hearings, but this did not last. Stress mounted—for the injured worker, their family, and for those advocates, like myself, who sought to set their claim right. The system and employers were becoming increasingly adversarial toward workers.

What had Happened?

Many factors contribute to the on-going shift away from what we might call compensation principles ^a to private insurance principles in Ontario's workers’ compensation system. However, the critical beginning was the introduction of experience rating, which put a crack in the system. Begun as an experiment (rolled out slowly industry by industry in the late 1980s), it was fully imbedded by 1990.

Experience rating introduced a system whereby employers’ payments to the Workers Compensation Board (WCB), as it was then called, were significantly adjusted based on the cost of injured workers’ claims arising from their firms. It implemented hefty surcharges for high firm costs and lucrative rebates for costs below the industry average. Employers became highly incentivized to minimize the cost of claims to avoid huge surcharges and potentially gain major rebates.

On paper, “minimize the cost of claims” means just that: lower costs, lower figures in the claims cost column. In real life, it means discouraging workers from reporting their incidents or illness. Or, once an incident is reported, pressuring the worker to quickly return to the workplace regardless of the severity of the injury and medical advice. In real life, it means mental and financial stress for the worker and their family and, too often, either a second injury or the transformation of a temporary condition into a permanent one. In real life, it means the loss of both employment and compensation income. In real life, it means not actually lowering the cost, but shifting it. The myriad of harms experienced by injured workers and their families, including family breakup ^{b , 2} and loss of home ^{c , 3} is the cost of that shift.

The great irony of the harm done is that experience rating was introduced to improve occupational health and safety in Ontario.

In Ontario, and across Canada, workers’ compensation system was established at the provincial level around 1915 as a public system funded by employers on a collective liability basis. In practice, it was organized as a modified version based on rate groups determined by the company's primary activity. In those days, before the existence of general taxation, it was discussed whether employers and workers of the province would co-fund the public system, or whether it would be funded by employers alone. Sir William Meredith, head of Ontario's one-man commission of inquiry that set the system's foundation, determined that employers alone should provide the funds. He noted:

The burden which the workman is required to bear he cannot shift upon the shoulders of anyone else, but the employer may, and no doubt will, shift his burden upon the shoulders of the community, or if he has any difficulty in doing that will by reducing the wages of his workmen compel them to bear part of it. ⁴

Given this form of funding, the Ontario system was designed on Meredith's principles. They included: it was no-fault, nonadversarial, and was to pay the worker for as long as the disability lasted. Essentially, it was a system in which both employers and workers would be protected from the potentially drastic financial impact associated with a specific injury. Workers got compensation payments. Employers were protected from lawsuits because injured workers no longer had the right to sue, except for rare exceptions, and now could treat the payments as a regular and predictable cost of doing business through collective liability.

The Ontario compensation board was established to administer claims in a system that Meredith explained, in his concluding paragraph, should provide “full justice.” ⁴ Employers, while interested in keeping overall rates and legislated entitlements low, rarely had an interest in a specific claim. Overall, employers were satisfied that the injured worker should receive compensation benefits and that the worker should return to work when sufficiently recovered from an illness or injury. Time off to heal was encouraged. The Workers’ Compensation Board proudly took on the motto: “Justice, speedily and humanely rendered.” ^{d ,5,6}

Other Canadian jurisdictions adopted this Ontario-based framework as a system designed to provide compensation to injured workers. It was not a system designed to tackle unsafe or unhealthy working conditions.

In 1980, the Ontario government commissioned an inquiry into the compensation system, with a view to redesigning it. Professor Paul C. Weiler ^{e , 7} delivered 2 reports, in 1980 and 1983. The second, Protecting the Worker from Disability: Challenges for the Eighties, introduced the concept of experience rating.

In Protecting the Worker from Disability, Weiler wades into thoughts about prevention. The best protection from disability, he says, is to prevent the incident, disablement, or disease in the first place. His analysis is founded on market-based principles, and he postulates: “It would seem plausible that the prospect of saving sizable sums in annual compensation assessments would serve as an effective inducement to individual firms to try to make their plants and operations safer.” ^{7 (p. 113)} In the following sentence, he indicates: “It would be nice if we had some direct empirical evidence to confirm or refute this hypothesis.”

Weiler casts about looking for evidence to support his hypothesis and finds little. There is some, but of little depth, from the USA, where experience rating is widely used. But, he feels, despite the lack of clarity, that it must surely work, and he wants to recommend it:

… when one recalls that we are starting from an intuitively plausible assumption in any event, this evidence provides more than enough support for the policy judgement that we should experience rate the system of workers’ compensation in Ontario in order to take advantage of this market incentive to make the workplace safer.^{7(p. 116)}

And thus, in Ontario, with the intended purpose of significantly improving occupational health and safety, we got a massive restructuring of the collective liability system toward individual liability, based on an “intuitive assumption.” The system was redesigned to provide annual rebates or levy surcharges on employers depending on the claims data emanating from the particular company.

Change Happened Quickly

Within the first 5 years of reporting on rebates and surcharges to employers (1993-1997), the WCB paid Ontario employers a massive $1.5 billion more in rebates than it assessed them in surcharges.

Workplaces Must be Getting Much Safer and Healthier!

At the legal clinic, however, we did not notice a reduction in calls from injured or ill workers. If anything, we became busier than ever. The calls became increasingly bizarre like the jam-burnt woman's employer claiming she had sunburn. A man called in, practically in tears. Despite a broken leg, his employer told him to come to work in an employer-provided taxi, lie on a cot, and use a handheld calculator to do sums. The man was a carpenter, not an accountant. A single mother with 3 children sat in my office, face masked with depression from the stress of not being able to pay rent, explaining that her employer told her she would lose her job if she put in a claim for the head injury she sustained from a falling box. Her unemployment insurance payments had run out and now she was on welfare.

The employers fought back when we took on these claims. This was something new. ^f Hired employer representatives tried to cast doubt on every aspect of the worker's claim: Was she in as much pain as she says she is? How can we tell? Why should we accept the doctor's report? We need objective medical evidence, MRIs, X-Rays, and CAT-scans. We need an independent medical report. What's wrong with working on a cot? It's good to get back to work as soon as possible. Physiotherapy appointments can be made after work hours.

What would have been straightforward entitlements in the past, became prolonged, complex, and stressful situations. In the process, we saw that workers were becoming more injured, both mentally and physically. They were also being thrown into poverty.

When we asked ourselves why this was happening, we eventually realized: it's the experience rating. We discovered that experience rating transforms an injured worker from a person needing assistance into a clear and present risk to the employer. In the market-based system, it is up to the employer to decide how to manage the risk: the employer can improve the conditions of work to have fewer injuries or illnesses, or the employer can try to prevent an injured or sick worker from receiving compensation benefits.

Prof Weiler assumed that employers would choose to improve the conditions of work. But at the legal clinic, we were seeing a different reality. Coming through the door in increasing numbers, my colleagues and I were seeing all those “risks” in distress seeking help to establish their compensation entitlements. It was our task to transform them back into people and to help them get that assistance.

The effort to keep injured workers off benefits is known as claims management and while little research has been done on experience rating, studies tend to show active claims management by employers.

Early in Ontario's implementation of experience rating, In his paper Employer responses to workers compensation insurance experience rating, of 1994, Boris Karlj did a case study ⁸ based on interviews with firms He found that 20% to 40% increased their “accident prevention” activities, while 96% focused on claim cost control. He noted: “It appears that a good deal of claims management activity is motivated by the experience rating incentive to minimize the number of claims reported to the WCB, and for any reported claims, to minimize its duration or cost.”

Neither this study nor others done around that time, showing the startling degree of claims management, caused any pause in the system by the WCB.

To help with claims management, private companies quickly sprang up to offer employers services to convert the threat of a surcharge into the likelihood of a rebate. Some blatantly advertised their services as helping to create a profit center for the employer ^g . In the world of injured worker advocates, we call it gaming the system.

There are 4 key ways to keep employees off benefits:

Implement systems to discourage reporting incidents or illnesses.

Challenge claims.

Outsource the more dangerous work.

Implement a return-to-work framework to prevent a worker from receiving benefits.

Each of These 4 Methods has a 2-Fold Harmful Effect

One harm is on the available knowledge and related action to actually improve occupational health and safety. The provincial health and safety authorities use claims data (the number of reported injuries and the days lost due to recognized claims) as a key indicator of workplace health and safety. A company that shows low claims as a result of managing claims not only skews the overall understanding of health and safety outcomes in the province but it is also more likely to avoid an inspection. ^h

Another harmful effect is on the individual injured worker and their family in the various ways noted in this article, with negative impacts on mental health and financial well-being standing out as dramatic shifts in fortune for these people.

Each of the 4 tactics deserves a full discussion and significant new research. Despite years of work with researchers, there are huge research gaps that need to be filled to illuminate and analyze the experience of injured workers and help us advocate for legislative, administrative, and policy changes that will protect workers and their families in the face of workplace injury and illness.

In my view, there is a critical need to examine the impact of experience rating on occupational health and safety. The effects work in the background, requiring research to bring it to light. One reason for the lack of research may be that funding sources steer the research in certain directions. Where are funding sources that clearly seek investigation into the purposes of systems, their design and operation, and their intended and unintended impact? ⁱ

I will touch briefly on 3 studies that do provide much-needed insight in a few areas: outsourcing of dangerous work, return-to-work, and impact on the WCB's own operation.

Outsourcing Dangerous Work

On the topic of outsourcing dangerous work in Ontario, there has been one significant research enquiry that I am aware of. In Workers’ compensation experience-rating rules and the danger to workers’ safety in the temporary work sector, Ellen MacEachen and her colleagues went behind the numbers, showing high incident statistics at temporary work agencies and talking to both workers and employers. ¹⁰ The study focussed on workers in low-skill jobs. This study helps to show the gaming in action. This quote from the published study highlights the potential for devastating results:

There was a steel container of plywood sheeting came from [abroad] . … and then a company in [Ontario] bought this load of lumber . . . and then they opened it up . . . and they find that the material was stored unsafely inside the container . . . So, instead of sending their workers, they got a hold of this temporary agency. And they sent two . . . workers from the temporary agency. And then when the doors were open, when they were handling the material, the load came apart and killed the guy. (Joseph, OSH Inspector).

Another quote further highlights the disconnect between health and safety and experience rating:

We were providing industrial labour . . . to a client. The client was receiving an award [workers compensation] for best health and safety practices. That day I had two people . . . rolled out the back door in the ambulance. The client kept his health and safety record up high because he outsourced to staffing companies all the risky jobs, all the heaviest lifting, all the jobs that required any type of dangerous work went to a staffing agency. So, his record looked . . . perfect . . . The WSIB [WCB] ^j thought he was great. (Vaughn, owner, mid-sized temporary work agency).

Implement a Return-to-Work Framework to Prevent a Worker from Receiving Benefits

The pressure for workers to return to work (RTW) too early creates many problems. An early study of RTW in small workplaces, by Joan Eakin, also went behind the numbers and interviewed both workers and employers. She uncovered “the discourse of abuse.” In small workplaces, the employer and workers often work side-by-side and have good relationships. However, along with certain WCB early-RTW policies, the experience rating incentives can provoke a rupture in the relationship with far-reaching consequences. She notes:

“ . . . Workers suffer under what we call the ‘discourse of abuse’—persistent, pervasive imputations of fraudulence and ‘overuse’ of rights. Surveillance and its effects can extend into the injured workers’ homes and family life. During the vulnerable and fragile stage of bodily injury and recovery, workers confront a range of social difficulties in determining when they should return to work, in managing issues of loyalty and commitment to the firm and employers, and in engaging in modified work that can be meaningless or socially threatening. For both employers and injured workers, damaged moral relationships and trust can trigger snowballing of social strains, induce attitudinal ‘hardening’ and resistance, and impede the achievement of mutually acceptable solutions to the problems of injury and return to work.” ^{11 (p. 22)}

Impact on the WCB's Operations

Later, intrigued by what she was hearing from injured workers about how they were being poorly treated by the WCB itself, Professor Eakin conducted a unique study in which she was granted access to the WCB's claims adjudication department to interview claims adjudicators and hear their end of telephone conversations with injured workers. She found:

The problem of (im)partiality. The study documented some evidence of how employers and injured workers were differently perceived and treated at the frontlines: the ‘employer pays’ discourse, the association of workers as costs and employers as revenue, and the legitimacy of economic self-advancement for employers but not for injured workers. These might be seen as privileging the employer (to avoid ‘biting the hand that feeds you’) and disadvantaging workers on the institutional playing field. Curiously, though, employers have been noted to believe that the WSIB [WCB] is typically ‘on the workers’ side’ ^{12 (p. 26)}

How different this perspective is from what the WCB articulated as its purpose and approach in the 1970's. The WCB itself has changed, at least in part through the increased involvement of employers due to their increased sensitivity about the cost consequences of compensation claims engendered by the experience rating system. Gone is the original understanding of why employers fund this public system. Gone is the understanding of the rational and importance of collective liability.

Through the years, I was part of a sustained effort to call these ill-effects to the attention of the workers’ compensation system and the Ontario government. We got some attention. Various inquiries were made. Results were left unattended.

In 2010, the Ontario government commissioned Harry Arthurs, former Dean of Law at Osgoode Hall and president of Toronto's York University, to conduct an inquiry into the funding of the workers’ compensation system, including experience rating. Prof Arthurs was unable to find sufficient research on the topic. However, he could not help but be concerned by what he heard from injured workers. In his final report Funding Fairness: A Report on Ontario's Workplace Safety and Insurance System, ¹³ Arthurs says on page 81:

In my view, the WSIB [WCB] is confronting something of a moral crisis. It maintains an experience rating system under which some employers have almost certainly been suppressing claims; it has been warned—not only by workers but by consultants and researchers—that abuses are likely occurring. But, despite these warnings, the WSIB [WCB] has failed to take adequate steps to forestall or punish illegal claims suppression practices. In order to rectify the situation, the WSIB [WCB] must now commit itself to remedial measures that might otherwise require more compelling justification. Unless the WSIB [WCB] is prepared to aggressively use its existing powers—and hopefully new ones as well—to prevent and punish claims suppression, and unless it is able to vouch for the integrity and efficacy of its experience rating programs, it should not continue to operate them.

Under the sting of constant reprimands about the experience rating system, the Ontario workers’ compensation system changed the model in 2020, replacing visible rebates and surcharges with a “band” system in which an employer's rates go up or down based on the claims data. Additionally, the legislation was amended to make claims suppression an offense subject to an administrative and court-ordered penalty. ¹⁴

These changes are relatively new and it is not yet possible to be certain about their effect. But there is little doubt in my mind that little, if any, improvement will occur; rather, the harm will continue. Anecdotal evidence from the legal clinic where I worked shows no improvement thus far.

The problem is that the “band” system still changes individual employer rates based on injury and illness claims from their firm and their cost. With no fundamental change to the incentive that has led employers to suppress claims, it seems likely that they still will not opt to focus on improving health and safety as Weiler theorized they would. The same problem exists—the easiest way for employers to avoid increased payments is to suppress claims.

Will making claims suppression an offense address the problem? It is hard to imagine it will. It was already an offense for an employer not to report a workplace incident to the WCB. How will claims suppression be known to the Board, if not through the injured worker? In general, claims suppression works by intimidating workers or offering them temporary on-going wages. Workers in those situations are not likely to speak up.

The Institute for Work and Health (IWH), ^k a research organization specializing in workers’ compensation issues, recently conducted a study seeking to identify the rate of underreporting in Ontario. The study examined emergency department visits for workplace injuries or illnesses that did not show up as work-related injury claims at the WCB. The result showed: “About 35 to 40 percent of emergency department visits for the treatment of workplace injuries or illnesses in Ontario don’t show up as work-related injury claims in the records of the province's workers compensation agency.” ¹⁵ Because the study did not survey or interview the workers themselves, the sources of the underreporting are unclear.

Another study in British Columbia, also conducted by the IWH and reported in an issue briefing in 2021, ¹⁶ took a closer look at why 54% of the 699 surveyed workers who had lost 2 days or more from work due to work injury or illness, did not make a claim for compensation benefits. The analysis categorized reasons into 3 broad categories: lack of knowledge, not worth time, and real or perceived inducements or pressure not to claim. The results are summarized below from Table 1 of the issue briefing.

Lack of knowledge: The person did not know they were entitled to wage-loss benefits (28.6%), they did not know how to apply for those benefits (16.6%), they were told by the employer that they were not eligible (6.9%).

Not worth the time: The person thought it was not worth the trouble to apply for the wage-loss benefits (20.3%), they thought their injury was minor (0.5%), or that their employer or sick-leave plan paid lost wages while off work (17.5%).

Real or perceived inducements or pressure not to claim: The person thought they would get in trouble if they reported their injury (7.8%), their employer pressured them not to apply for benefits (4.1%), and finally, their co-workers encouraged them not to apply for benefits for fear that they would lose a bonus (3.2%).

The authors concluded that claims suppression is not the main cause of underclaiming and estimate that 3.7% to 13.0% may be attributed to claims suppression. In part, this is likely due to a narrow definition of claims suppression as clear direct pressure. For example, they did not include the 17.5% who did not claim because their employer directly, or through a sick leave plan, covered the lost wages while off work.

In my experience, at the legal clinic, such wage-loss coverage is part of claims suppression as the purpose is to prevent the worker from making a lost-time claim (or a claim at all) to prevent increased company compensation rates. By my calculation, at least 78% of the underclaiming identified in this survey can be attributed to claims suppression, including the 40% who indicated they did not know they were covered or did not know how to go about making a claim. It is the employer's responsibility to make sure workers know these facts and processes.

Also missing from what is understood as claims suppression is the conversion of lost-time claims to nonlost time claims through RTW plans. While complying with the law by reporting claims to the WCB, employers understood that there would be no financial consequence to their rate level if there was no record of lost time. We want employers to hire or ensure a return to work for ill or injured workers—but only once there has been sufficient treatment and recovery time. At the legal clinic, we were seeing workers who received a standard form letter on the day of the injury stating that there was suitable work available for them the very next day. There was no correlation between the letter and the nature and severity of the injury.

Regardless of what precise definitions and numbers we give to the analysis, one thing is clear: Weiler's intuitive assumption that experience rating would improve workplace health and safety has been proven to be an incorrect and damaging hypothesis. The WCB's use of experience rating has harmed workers, sometimes irreversibly, for over 3 decades now.

Experience rating has created a new health and safety hazard in and of itself: exposing workers to the most dangerous work through the use of temporary agencies; worsening injuries through an inappropriate RTW and related lack of healing time; exposing injured workers to the raw frustration of co-workers and production managers who are impeded in doing their jobs; provoking psychological injury through an intense adversarial process; and throwing workers and their families into poverty.

On this basis, it should be banned.

Experience rating also has mobilized a powerful private industry that represents employers through the cash cow of experience rating. Along with claims management practices, this group's political lobbying has become well entrenched. This industry has the ear of government, especially the business-oriented provincial governments of recent decades in Ontario. Even the name of the Board was changed from Workers’ Compensation Board to Workplace Safety and Insurance Board (WSIB), eliminating the words “workers” and “compensation” from our view.

What we have now is a government determined to downsize the workers’ compensation system; experience rating has been an effective tool in the process.

What is to be Done?

Put simply, nothing will change until experience rating stops rating the wrong experience. If we truly want to improve occupational health and safety, we need to inspect and measure the conditions of work. Remedial and punitive action based on the results of these inspections can more effectively motivate employers to improve working conditions. For example, remedial action can be government expertise and financial support to improve equipment. Punitive action can be hefty fines and ongoing regular inspections.

The simplest way to move swiftly away from the harm to injured workers and their families is to abolish financial incentives to employers based on claims data. To do that thoroughly, many in Ontario's injured worker community believe we should have a simple payment system for employers: one rate for small employers and one rate for large ones. That is, except for the variation based on small or large, all employers will pay the same percentage of payroll to fund the compensation system, regardless of the nature of the sector and regardless of incident/illness claims. While some employers and their advocates will cry “But that's not fair!”, it is no less fair than the present system. Even from an employer's perspective, those who game the system pay less than those who do not. A single or 2-rate system will end gaming and can reestablish a no-fault, nonadversarial, collective liability system.

With this simple measure, a public institution intended to protect workers hurt and made ill by their jobs, and their families, can begin again to proudly proclaim that its purpose is to provide “Justice, speedily and humanely rendered.”^17,18