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ACC levies and experience rating

24 January 2019 - By By Don Rennie

The Accident Compensation Corporation made the following public announcement on 10 January 2019:

“$22 million set aside to help businesses reduce workplace injury: Next month Kiwi businesses will be able to make a bid for a share of a new $22 million fund that’s been created to help improve workplace health and safety.”  

Consequences for ACC Systems

This proposal makes a nonsense of both the variable levy rate risk based classification system implemented by successive ACC administrations, and the experience rating system adopted by ACC some years ago, which still applies to some levy payers.

It seems that the ACC is now going to fund levy payers to achieve a reduction in levies payable based on claims experience, when the two existing systems have failed to achieve their purpose but still remain in operation.

The purpose of variable levy rates and experience rating

Variable levy rates are designed to provide different rates of levies in industries or occupations where there are different risks of claims in various classification groups. They are set on a “user pays” basis in respect of each industrial classification group according to the cost of claims arising from that groups industrial activities compared to the total cost of all claims on the levy fund.

Experience rating allows for an adjustment to premiums where it can be shown a liable payer has a lower (or higher) claims experience than others in the same classification group.

What the Woodhouse Report recommended

The Woodhouse Report discussed the classification of risks in paragraph 314, pointing out that all industrial activity is interdependent and that the ACC system ignores individual liability in favour of community responsibility. The Report observed that 20 years earlier (ie,1947) on the basis of interdependence of industries, classifications were discarded by the United Kingdom.

It discussed merit rating in paragraphs 328 to 339 and concluded in paragraph 336 that there is no evidence that the process has any significant effect in the interests of safety.

The Report recommended at paragraph 314(d) a flat levy rate for employees and the self-employed based on salaries and wages paid to employees and net tax assessable income of self-employed. It said at paragraph 353(6) that merit rating or experience rating is ineffective as a means of promoting safety.

What is Experience/Merit Rating?

Experience or merit rating is a method of varying an individual employer's levy according to the claims experience or accident rate compared with other employers in the same levy class.

Economists argue that enterprise costs of workplace injuries should be internalised to eliminate any distortion to the cost structure. Some advocate charging employers in a way that truly reflects their actual contribution to the total cost of work injuries and diseases.

There is little evidence that experience rating systems, which have been tried both here and overseas, actually improve workplace safety and/or reduce either injury severity or accident frequency resulting in lower claims costs.

Accidents are by definition random unintended events the consequences of which are largely a matter of chance. Accidents are beyond the control of even the most conscientious employer with the safest and most regulated work environment. For example, an employee may suffer a simple accident like tripping on the stairs in a workplace which has all the safety features in place. The consequences of the fall may be a few bumps and bruises but no ACC claim. On the other hand, the fall may cause a severe head injury with brain damage resulting in a lengthy time off work and a financially significant ACC claim.

Under an experience rating system, the accident will either not be recorded at all, or the employer may have a significant penalty imposed where a claim has been lodged with ACC, simply because the outcome of the fall in one case was insignificant, but in the other an expensive claim was registered.

In other words, the claims experience has nothing to do with whether or not the employer has implemented the optimum safety and accident prevention systems and environment.

What is the evidence?

There is no evidence that experience rating systems improve workplace safety but there is evidence that such systems lead to a number of negative health and safety outcomes. For example:

  • Experience rating cannot be applied until the individual employer's claims experience is accumulated and compared with other employers in the same levy class. This is usually done on an annual basis coinciding with the levy year (the ACC apparently uses 3 years). This means that if an injury producing accident occurs because of some defect in the work environment and the defect is corrected at the time of the accident, the employer will still be charged an experience rated penalty when levy payable is calculated. The decision to improve the workplace was not driven by the experience rating system but for more practical reasons like preventing a reoccurrence and dealing with the immediate issues of treating the injured worker and getting production back on line.
  • An employer with a horrendously unsafe workplace who has taken no steps to implement safe workplace standards or to train staff on safety practices and procedures, may have the good fortune not to have an ACC claim recorded and will therefore qualify for a no claims bonus.
  • The only liability a New Zealand employer has to compensate an injured employee is the liability to pay “first week” compensation for a work accident. It will therefore be tempting for an employer to pay an injured worker first week compensation and persuade the worker to record the injury as happening in a non-work environment. Once the worker has received first week compensation all the other entitlements are automatically paid by ACC and the injury will not be recorded on the employer's record so will not affect entitlement to a no claims bonus.
  • Small employers and self employed persons are unlikely to report an injury as work related if entitlement to no claims bonus is put in jeopardy. Small employers and self employed people often do not work formal hours in a fixed workplace environment so it is almost impossible to tell when they are working. For example, if a self employed consultant takes a client to play golf to discuss a business proposition and is injured while playing, it is unlikely that the injury will be reported as “work related” if it will affect entitlement to a no claims bonus.
  • Occupational diseases, hearing loss and long latency diseases create intractable problems when recording claims for experience rating purposes. Which employer is to be charged with the cost of the claim and how the relative liability between different employers is to be calculated, will produce problems and room for argument. The outcome will likely have no influence on workplace health and safety for the employer ultimately found liable.
  • In the present employment environment, people often have multiple employments and employees presenting with work related injuries pose problems as to which employer should be charged with the cost of a claim for experience rating purposes. The system presents fruitful opportunities for lawyers to argue the point.
  • The Christchurch earthquake in which many people were killed or injured while at work, further highlights the unfairness in allocating work injury costs under an experience rating system. Similarly the drive by shooting of a worker while at work and cases where the injury to a worker is caused by a negligent third party contractor, indicate the inherent unfairness of an experience rating system in a no fault environment.
  • Experience rating implies fault on the part of the employer giving rise to cost to the scheme. However, ACC is a “no fault” scheme as far as the accident victim is concerned and it is unfair to load the cost of a work accident on a levy payer’s liability to pay a levy to support the scheme.
Overseas schemes

Experience rating schemes as applied in other countries, are limited in their application to larger employers and in many cases, employers are only partially rated. In the United States, 85% of employers are too small to be experience rated. In New Zealand 90% of employers employ 10 people or fewer, 98% employ fewer than 100 and only 2% employ 100 or more employees. If experience rating was to work at all in New Zealand, it could only do so for less that 2% of all employers.

The concept of competition between levy payers

Levy payers believe that if they have a lower claims experience than others in the same risk classification with whom they are in competition, their efforts at improving health and safety in their workplace should be rewarded by some form of reduced levy or bonus on ACC levies. This is what happens in the insurance industry, through no claims bonus schemes.

However it ignores the fact that ACC is not insurance, it is a statutory legal system and a form of social insurance which must be paid for by universal compulsory levies or taxes.

Impact of recent legislation on health and safety

The Health and Safety at Work Act 2015 has had a much more effective and immediate impact on health and safety in workplaces than any of the provisions in the ACC legislation relating to risk based classification of industries or any experience rating system could possibly have.

The new legislation which makes PCBUs (Persons Conducting Business Undertakings) personally liable for the consequences of workplace accidents, and exposes them and their business to significant fines, brings about immediate action by management to improve the working environment. That legislation has had a dramatic effect on workplace health and safety in New Zealand

Conclusion

(1) The complicated and expensive ACC variable risk-related classification system for setting and enforcing payment of levies should be abandoned in favour of the Woodhouse recommendation of a flat rate levy based on a percentage of the national payroll.

(2) Although employers mistakenly believe that they should be rewarded by some form of no-claims bonus or reduced levy, there is no evidence that the ACC experience rating system has any impact on health and safety in the workplace. With the introduction of the recent and obviously much more effective Health and Safety at Work Act 2015,  the ACC experience rating scheme should be abandoned.

Don Rennie rendon@actrix.co.nz is convenor of the New Zealand Law Society's ACC Committee. He has worked for the ACC and in private practice and is widely published in the areas of accident compensation and personal injury. The opinions in this article are those of Mr Rennie in his private capacity.

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Last updated on the 24th January 2019