California Attorney’s Fee Awards in a Shifting Economy: Application of COLA

By Marianne Tancor, J.D.

How to calculate and award reasonable attorney’s fees has long been a hotly disputed issue confronting the WCAB. Adding to the fire in cases where attorney’s fees must be calculated on lifetime awards of PTD or life pensions, is the issue of how, in the face of shifting economic conditions, to fairly and properly account for an injured worker’s State Average Weekly Wage (SAWW) increases or Cost of Living Adjustments (COLA) so as to assure adequate compensation to the injured worker’s attorney without adversely affecting the worker’s PD payout over his or her lifetime.

Although the DEU currently assumes future COLA increases to be 4.6% based upon a 50-year average, utilizing the 4.6% assumed increase to calculate attorney’s fees can result in disproportionate fee awards to the detriment of the injured worker if the actual annual COLA is lower than the predicted increase in any given year. As aptly explained by the WCAB panel in Gilmore v. Autoland Resale Center, 2013 Cal. Wrk. Comp. P.D. LEXIS 148 (lexis.com), 2013 Cal. Wrk. Comp. P.D. LEXIS 148 (Lexis Advance) [see also, Voeltz v. The Kroger Company, 2013 Cal. Wrk. Comp. P.D. LEXIS – at footnote 4 (writ denied January 14, 2014) and Munson v. W.C.A.B. (2012) 77 Cal. Comp. Cases 384 (lexis.com), 77 Cal. Comp. Cases 384 (Lexis Advance) (writ denied)]:

A commuted attorney’s fee is based on the estimated present value of the employee’s lifetime permanent total disability award using a predicted average annual increase in the SAWW and, therefore, a predicted average future COLA. But over his lifetime, the employee will receive actual annual COLAs based on the actual annual increase in the SAWW from year to year, if any. Accordingly, if the predicted average future COLA (e.g., 4.6%) is more than the actual COLA (e.g., 2.99% in 2010 or 0% in 2011) in any given year, then the employee’s commuted bi-weekly benefits for that year will have been disproportionately reduced to accommodate the attorney’s fee. Of course, we realize there may be years during an injured employee’s expected lifetime where the actual annual COLA will be greater than the assumed COLA. However, provided that the attorney’s fee being commuted is “reasonable” in light of the responsibility assumed, care exercised, time involved, and results obtained (Lab. Code, § 4906(d); Cal. Code Regs., tit. 8, § 10775), we believe the risk that the actual COLA will be greater than the assumed COLA is better borne by the attorney. After all, it is the attorney, not the injured employee, who benefits from the commutation of the attorney’s fee.

The WCAB in Voeltz pointed out that any disproportionate reduction in an injured worker’s award is exaggerated in each following year because the assumed 4.6% average future COLA compounds. This results in a commuted attorney’s fee based on constantly escalating assumed PTD or life pension payments, with the injured worker’s actual payments not increasing by nearly as much.

While the WCAB clearly recognizes that COLA increases must be considered in calculating attorney’s fee awards and has found complete exclusion of the increase in such calculations to be unreasonable, the WCAB’s desire to place the risk of an uncertain economy and potentially reduced COLA on the attorney instead of the injured worker has led the WCAB in recent cases to apply a lower COLA in awarding attorney’s fees or to allow the WCJ discretion in selecting the COLA, rather than automatically applying the 4.6% annual increase assumed by the DEU. For instance, in Oyas v. California State Department of Corrections, 2013 Cal. Wrk. Comp. P.D. LEXIS 174 (lexis.com), 2013 Cal. Wrk. Comp. P.D. LEXIS 174 (Lexis Advance), the WCAB rescinded an award of attorney’s fees when the WCJ excluded COLA increases from the fee calculation based upon his concern that use of the 4.6% assumed COLA increase was speculative. The WCAB reasoned that economic uncertainty should not deter the WCJ from relying upon the DEU’s commutation calculations which factor in the COLAs in Labor Code § 4659(c), and returned the matter to the WCJ for a new award of attorney’s fees incorporating a “reasonable SAWW adjustment factor.” Likewise, in Voeltz the WCAB instructed the WCJ to include COLA increases in awarding attorney’s fees on the entire present value of applicant’s 82 percent PD award, but did not specify the appropriate COLA increase to be applied by the WCJ.

In Gilmore, the WCAB similarly found that the WCJ unreasonably excluded COLA increases in calculating attorney’s fees on applicant’s PTD award, however, unlike the panels in Oyas and Voeltz, concluded that the fee award should be based on a projected 3% average increase in the SAWW. To arrive at the 3% figure, the WCAB examined the SAWW increases between the years 2005 and 2012, and noted that the average SAWW increase was 2.76% during those years as compared to the 50-year average of 4.6%. According to the WCAB, a COLA of 3% was reasonable in light of the current economic trends and was in accordance with the WCAB’s desire to prevent disproportionate reduction of applicant’s award to accommodate the attorney’s fee. The WCAB has approved application of a 3% COLA increase in prior cases as well [see, e.g., Wilson v. Piedmont Lumber and Nursery, 2012 Cal. Wrk. Comp. P.D. LEXIS 48 (lexis.com), 2012 Cal. Wrk. Comp. P.D. LEXIS 48 (Lexis Advance)].

For the ten-year period since the passage of SB 899, the average SAWW increase is 3.04%. The WCAB cautions that this ten-year average may not be accurate in projecting future SAWW increases, however questions whether utilizing the longer 50-year average generally relied upon may be even less predictive of increases [Powasnick v. Sonoma Development Center, 2013 Cal. Wrk. Comp. P.D. LEXIS 574 (lexis.com), 2013 Cal. Wrk. Comp. P.D. LEXIS 574 (Lexis Advance)]:

. . . [A] ten year average may not be the most accurate method for projecting increases in the SAWW. In some cases, the WCJ has instructed the Disability Evaluation Unit (DEU) to use a 50 year average when calculating commutations (State Comp. Ins. Fund v. Workers’ Comp. Appeals Bd. (Luis) (2012) 77 Cal.Comp.Cases 470 [writ den.].) While a longer time period might be more predictive of future wage growth, anomalous economic events, notably stagflation in the late 1970’s, might make a 50 year average less predictive.  After considering these factors . . . the WCJ should request a commutation calculation from the DEU based on a reasonable predicted SAWW increase.

Although recent decisions involving attorney’s fee awards establish the WCAB’s policy against applying COLA increases that could disproportionately reduce an injured worker’s ultimate recovery, there has been little guidance provided so far with respect to how an appropriate or "reasonable" COLA is to be determined. Moreover, it remains unclear what evidence must be produced to rebut application of the 4.6% assumed COLA increase. Particularly challenging are cases involving younger applicants with longer life expectancies and, conversely, applicants who have shorter than average life expectancies due to their medical conditions. It will be interesting to see how the WCAB handles these issues going forward, and whether any guidelines will be promulgated in the future to aid in the determination of how to properly apply COLAs in the attorney’s fee calculation.

© Copyright 2014 LexisNexis. All rights reserved. This article will appear in a forthcoming issue of California WCAB Noteworthy Panel Decisions Reporter (LexisNexis).

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