Md. high court: Net income controls workers’ comp for solos

Maryland’s high court ruled unanimously Wednesday the “average weekly wage” of sole proprietors who elect coverage under the state’s workers’ compensation system is calculated based on their net profits and not gross revenue, marking a defeat for single-person businesses.

The net-profit basis comports with the Maryland Workers’ Compensation Act by preventing sole proprietors from receiving more money through injury than by working, the Court of Appeals said in its first foray into calculating the average weekly wage of an owner/employee who elects coverage under the MWCA.

In its 7-0 decision, the high court noted that compensation through the state-monitored Injured Workers’ Insurance Fund is based on an employee’s salary, not the company’s more lucrative gross revenue. This remains true even when the employee is the entire company, the court added.

“In our view, a sole proprietorship’s net profit is the best approximation of the earnings that a sole proprietor actually takes home because, unlike the sole proprietorship’s gross income or gross receipts, net profit [accounts for] the sole proprietorship’s business costs and expenses,” Judge Shirley M. Watts wrote for the high court. “Ultimately, using a sole proprietorship’s net profit instead of its gross income or gross receipts avoids the pitfall of a possible windfall to the sole proprietor whereby the sole proprietor would receive more compensation by being injured than by working.”

The Court of Appeals’ decision resolved a dispute between IWIF, backed by the Maryland Workers’ Compensation Commission, and Patrick Long over the compensation owed him for a permanent disability he suffered in July 2011 while installing carpet as sole proprietor of Long’s Floor Works.

IWIF argued that Long’s average weekly wage, upon which workers’ compensation is ultimately calculated, should be based on his company’s net profit of $11,747 for the 12 months prior to his injury divided by 52, the number of weeks in a year. The resulting average weekly wage would be $225.90, IWIF argued.

Long countered that his AWW should be based on his company’s gross revenue of $24,319.54 for the 14 weeks prior to his injury, for an average weekly wage of $1,737.11

The commission ultimately settled on an AWW of $496.44 based on a formula that considered Long’s Floor Works’ net profit, not its gross revenue.

The commission’s calculation was upheld by the Montgomery County Circuit Court in February 2014 and the Court of Special Appeals in a reported opinion last September.

Long sought review by the Court of Appeals, which agreed with the lower courts that net profit – not gross revenue — is the correct barometer by which to measure a sole proprietor’s average weekly wages.

“To hold otherwise would produce the illogical and unreasonable outcome that would create a windfall for sole proprietors, who would be entitled to far greater workers’ compensation benefits than employees who do the same work for the same earnings,” Watts wrote.

Neither Long’s attorney, Bruce M. Bender, nor IWIF’s counsel, James R. Forrester, returned telephone messages seeking comment on the decision Wednesday. Bender is with Axelson, Wlliamowsky, Bender & Fishman PC in Rockville; Forrester is with Semmes, Bowen & Semmes in Baltimore.

The Court of Appeals rendered its decision in Patrick Long v. Injured Workers’ Insurance Fund et al., No. 90, September Term 2015.