Federal Employees' Compensation Act: Redefining Continuation of Pay Could
Result in Additional Refunds to the Government (Letter Report, 06/08/95,
GAO/GGD-95-135).

Pursuant to a congressional request, GAO reviewed several issues
relating to the Federal Employees' Compensation Act (FECA) and how it is
administered by the Department of Labor's Office of Workers'
Compensation Programs.

GAO found that: (1) the federal government is not reimbursed for
continuation of pay (COP) by federal employees receiving both regular
salary payments and third party damages; (2) the federal government
would recover $1 to $2 million per year if it obtained refunds of COP in
third-party cases;(3) additional costs and effort to obtain refunds of
COP in third-party cases would be minimal if previous reinstatement
procedures were used to obtain employee refunds of compensation benefits
and COP; (4) some agencies have a separate COP code in their payroll
systems that allows them to easily determine the amount of COP paid to
their employees; and (5) the amount of COP that could be refunded to the
government would greatly exceed the administrative costs to recover COP.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-135
     TITLE:  Federal Employees' Compensation Act: Redefining 
             Continuation of Pay Could Result in Additional Refunds to 
             the
             Government
      DATE:  06/08/95
   SUBJECT:  Federal employees
             Compensation
             Refunds to government
             Disability benefits
             Federal personnel law
             Compensation claims
             Workers compensation
             Federal employee disability programs
             Disability insurance
             Payroll systems
IDENTIFIER:  Employees' Compensation Fund
             
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Cover
================================================================ COVER


Report to Congressional Requesters

June 1995

FEDERAL EMPLOYEES' COMPENSATION
ACT - REDEFINING CONTINUATION OF
PAY COULD RESULT IN ADDITIONAL
REFUNDS TO THE GOVERNMENT

GAO/GGD-95-135

Continuation of Pay Refunds


Abbreviations
=============================================================== ABBREV

  COP - continuation of pay
  ECAB - Employees' Compensation Appeals Board
  FECA - Federal Employees' Compensation Act
  OWCP - Office of Workers' Compensation Programs

Letter
=============================================================== LETTER


B-259958

June 8, 1995

The Honorable Joseph I.  Lieberman
The Honorable Thad Cochran
United States Senate

At your request, we recently reviewed several issues relating to the
Federal Employees' Compensation Act (FECA) and how it is administered
by the Department of Labor's Office of Workers' Compensation Programs
(OWCP).  Part of our work, which provides the basis for this report,
focuses on the costs and benefits of a former federal government
practice of obtaining refunds for continuation of pay (COP) benefits
when federal employees receive damages from third parties who are
liable for the employees' work-related injuries that caused them to
be absent from work.  The government used to obtain COP refunds in
third-party cases, but it discontinued this practice in 1986
following decisions by the Employees' Compensation Appeals Board
(ECAB) and a federal appeals court. 

FECA (5 U.S.C.  8118) authorizes federal agencies to continue paying
employees their regular salaries for up to 45 days (called the COP
period) when they are absent from work due to work-related traumatic
injuries.\1 COP benefits end after 45 days.  If employees continue to
be absent from work due to their injuries, they are entitled to
compensation benefits for lost wages, rather than their regular
salaries.\2 Third-party liability occurs when a person or entity
other than the U.S.  government is responsible for an employee's
on-the-job injury (e.g., a dog bite or an automobile-related injury). 

This report addresses the costs and benefits of the government
reestablishing its former practice of obtaining refunds of COP when
employees recover damages from responsible third parties.  (App.  I
contains a detailed description of our objectives, scope, and
methodology.)


--------------------
\1 OWCP defines traumatic injury as a wound or other condition of the
body caused by external force that is identifiable by time and place
of occurrence and member of the body affected.  It must be caused by
a specific event or incident, or series of events or incidents,
within a single day or work shift. 

\2 FECA distinguishes between COP and compensation benefits.  COP is
regular salary paid by the agency that employs the injured employee. 
Compensation benefits, on the other hand, are paid by OWCP from the
Employees' Compensation Fund and include payments for wages lost
beyond the 45-day COP period and payments for (1) medical expenses,
(2) vocational rehabilitation, (3) bodily impairment or
disfigurement, and (4) survivors' compensation. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Because of current interpretations of FECA by ECAB and a federal
appeals court, the federal government has no legal basis to obtain
refunds of COP paid to injured employees when those employees recover
damages from third parties who are liable for their on-the-job
injuries.  A basis could be provided, however, by amending FECA.  As
a result of the current interpretations, employees can receive
regular salary payments from their employing agencies and
reimbursement from third parties--in effect, a double recovery of
income for their first 45 days of absence from work due to injury. 
In contrast, employees may not receive double recoveries for
compensation benefits, such as medical expenses whenever they are
incurred or compensation in lieu of pay after 45 days, because FECA
provides that the government can recoup funds for these expenditures
from employees receiving third-party recoveries. 

We determined that the government could recover an estimated $1
million to $2 million per year if it were to obtain refunds of COP in
third-party cases.  The Postal Service would realize about 70 percent
of these recoveries.  This could be accomplished if Congress were to
amend FECA to require that COP payments in third-party cases be
treated like compensation benefits for the purpose of refunds to the
government from third-party recoveries.  Thus, injured employees
could not receive double recoveries for COP periods because the
government could also recoup funds for COP expenditures from
employees receiving third-party recoveries.  According to Labor and
Postal Service officials, the amount of COP that could be refunded to
the government when employees receive damages from responsible third
parties would greatly exceed the administrative costs to recover it. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Initially enacted in 1916, FECA (5 U.S.C.  8101-8193) is the workers'
compensation law for federal employees.  FECA authorizes the
government to compensate employees when they are temporarily or
permanently disabled due to an injury or disease sustained while
performing their duties.  Other benefits provided by FECA include
payments for (1) medical expenses, (2) vocational rehabilitation
services, (3) bodily impairment or disfigurement, and (4) survivors'
compensation. 

Compensation benefits paid under FECA are financed by the Employees'
Compensation Fund.  OWCP bills agencies annually for the amount of
payments made from the fund on account of injuries suffered by their
employees.  Agencies then reimburse the fund from their
appropriations or operating revenues.  In fiscal year 1994, OWCP
reported that it paid about $1.9 billion from the fund for injured
employees' compensation and other benefits. 

When third parties are responsible for employees' injuries, Labor may
require that employees pursue collection action against third
parties.  When employees recover damages from third parties, FECA (5
U.S.C.  8132) requires these employees to reimburse the government
amounts that would cover the compensation benefits they received. 
The underlying purposes of requiring employees to reimburse
compensation paid by the government in these circumstances are to (1)
prevent federal employees from obtaining double recoveries--i.e.,
compensation benefits from the government and damages from a third
party for the same injury--and (2) minimize the cost of FECA to the
federal government.\3

Labor also may require that employees assign their collection rights
against third parties to it.  However, a Labor attorney told us Labor
has not required such assignments because it has not had the staff to
pursue third-party claims on behalf of employees.  Employees, on the
other hand, have an incentive to pursue third-party claims because
FECA allows employees to retain at least 20 percent of the net amount
they recover after expenses of the suit or settlement have been
deducted. 

Labor has authorized the Postal Service to administer some
third-party claims filed by Postal Service employees and to accept
voluntary assignments of employees' rights to pursue third-party
claims in some cases.  A 1980 agreement between OWCP and the Postal
Service provides that the Postal Service may administratively pursue
collection of damages from third parties liable for some traumatic
injuries sustained by Postal Service employees.  Postal Service
employees, because of the nature of their work, have a greater risk
of exposure to injuries caused by third parties than many other
federal employees.  For example, mail carriers are more likely to be
exposed to dog bites and unsafe stairs and porches.  The Postal
Service's injury compensation manager told us that the Postal Service
will pursue damages from responsible third parties on behalf of its
employees in cases where it believes the amount of money that could
be recovered is significant enough to expend the resources. 

When either OWCP or the Postal Service receives claims involving
third parties, they are to inform employees of their responsibility
to pursue collection action against the third party.  Employees are
also to be informed that they should contact either OWCP or the
Postal Service and obtain a statement of disbursements made by the
government before they settle with the third party. 

In 1974, Congress enacted the COP provision because of delays that
occurred between the time an injured employee filed a traumatic
injury claim and the time the employee actually started receiving
compensation benefits.\4 According to a Senate Committee report,
Congress made it clear that COP was to be treated as regular salary,
subject to federal and state income taxes.\5 In contrast, workers'
compensation benefits are tax free.  It was not clear, however,
whether Congress intended that COP should or should not be recovered
in third-party cases.  In fiscal year 1993, OWCP estimated that
federal agencies paid $61 million for COP. 

According to a Labor official, following the enactment of the COP
provision, Labor began seeking and obtaining refunds of COP from
federal employees who received third-party recoveries.  This official
explained that Labor based its right to obtain COP refunds on FECA's
requirement that employees reimburse compensation benefits paid by
the federal government from third-party recoveries and on the common
law right of equitable subrogation.\6 When OWCP received refunds from
employees, it credited the Employees' Compensation Fund for the
amount of the refund that represented compensation benefits, and it
returned the COP portion of the refund to the agency that paid the
injured employee's salary. 


--------------------
\3 See United States v.  Lorenzetti, 467 U.S.  167, 177 (1984). 

\4 FECA authorizes COP for traumatic injuries only.  Employees with
approved occupational disease claims receive compensation benefits
for lost wages.  OWCP defines occupational diseases as conditions
produced in the work environment over a period longer than 1 workday
or shift.  Occupational diseases may result from (1) systemic
infection; (2) repeated stress or strain; (3) exposure to toxins,
poisons, or fumes; or (4) other continuing conditions of the work
environment. 

\5 S.  Rep.  No.  1081, 93d Cong., 2d sess., reprinted in 1974 U.S. 
Code & Ad.  News 5341, 5344. 

\6 Equitable subrogation is a legal theory, developed in common law
courts, which allows one person to acquire the rights of another
person to bring a claim for damages against a third party. 


   THE FEDERAL GOVERNMENT IS
   CURRENTLY NOT REIMBURSED FOR
   COP
------------------------------------------------------------ Letter :3

Currently, the federal government has no legal basis to obtain
refunds of COP paid to employees when they receive recoveries from
third parties liable for their injuries.  This position resulted from
decisions by ECAB\7 and the U.S.  Court of Appeals for the Ninth
Circuit.  These decisions, however, did not affect OWCP's authority
to obtain refunds of (1) compensation benefits in lieu of pay
received by injured employees following the 45-day COP period and (2)
such other compensation benefits as medical expenses paid to or on
behalf of injured employees during or after the 45-day COP period. 

In a June 1985 decision, ECAB held that OWCP could not recover COP
when employees received damages from third parties.  ECAB recognized
that the purpose of reimbursing compensation benefits when employees
received damages from third parties was to prevent the employees from
obtaining double recoveries.  However, ECAB stated that FECA
specifically provided that COP was not compensation, and FECA only
required refund of compensation benefits in third-party cases.\8 In
August 1985, the U.S.  Court of Appeals for the Ninth Circuit held
that FECA established the government's exclusive remedy for
reimbursement from any damages federal employees might recover from
third parties and no common law remedy, such as equitable
subrogation, was available.\9 In response to the ECAB decision, OWCP
issued a bulletin in March 1986 stating that it would no longer
include COP in the amount to be refunded by employees following
third-party recoveries. 

After ECAB's and the Court of Appeals' decisions, three class action
suits were filed on behalf of federal employees who had previously
refunded COP to the government.\10 These suits sought to compel the
government to repay COP that employees had refunded to it following
third-party recoveries.  The suits were either litigated or settled
in favor of the employees.  According to a Labor official, the suits
provided for the government to return over $5 million to claimants
who had previously refunded COP to the government.  Table 1
summarizes the claimants and amounts of COP involved in the class
action suits. 



                           Table 1
           
            Claimants and Amounts of COP Benefits
                Involved in Class Action Suits

                                            COP
                                         repaid
                                             to  Time frame
Name of suit  Claimants               claimants  covered
------------  ---------------------  ----------  -----------
Evich         1,146 employees in       $999,956  August
              the Ninth Circuit                  1979
              from 20 different                  to
              agencies (including                March 1986
              the Postal Service)

National      2,946 Postal Service   $2,645,536  September
Association   employees not                      1982
of Letter     included in Evich                  to
Carriers                                         March 1986

Owens         1,192 employees from   $1,795,984  April 1983
              42 different agencies              to
              (including the Postal              March 1986
              Service) not included
              in Evich or Letter
              Carriers
------------------------------------------------------------
Source:  GAO analysis of Labor's Office of the Solicitor data. 


--------------------
\7 ECAB was established within the Department of Labor as an entity
separate from OWCP to consider and decide appeals from final
decisions of OWCP in any case arising under FECA. 

\8 Paul L.  Dion, 36 ECAB 656 (1985). 

\9 Janakes v.  United States Postal Service, 768 F.2d 1091 (9th Cir. 
1985). 

\10 Evich v.  Brock, No.  C85 6091 JPV (N.D.  Cal.  1986); National
Association of Letter Carriers, AFL-CIO v.  United States Postal
Service, Civil Action No.  88-2525 TAF (D.  D.C.  1989); and Owens v. 
The United States Department of Labor, Civil Action No.  89-981 TAF
(D.  D.C.  1989). 


   ESTIMATED RECOVERABLE AMOUNT IS
   $1 MILLION TO $2 MILLION PER
   YEAR
------------------------------------------------------------ Letter :4

Based on our and OWCP's calculations, we estimated that the federal
government could recover from $1 million to $2 million per year if it
obtained refunds of COP in third-party cases.  We also estimated that
the Postal Service would realize about 70 percent of these
recoveries.  The amount of COP recovered would be in addition to the
amount of compensation benefits refunded to Labor from third-party
recoveries, which totaled $11.5 million in fiscal year 1994. 

Because the government has not obtained COP refunds in third-party
cases in recent years, we used several different methods to determine
how much the government might recover in these types of cases if FECA
were to be amended.  Using information on (1) COP benefits paid in
the past from the class actions filed by employees who had previously
refunded COP, (2) Postal Service COP recoveries in third-party cases
during fiscal year 1985, and (3) a sample of COP paid in third-party
cases by the Postal Service in calendar year 1994, we estimated that
the annual amount of COP that could be recovered ranged from $1.3
million to $2 million.  For the estimates that were based on the
amount of COP paid and recovered in the past, we also factored in the
rate of federal General Schedule pay increases from 1986 to 1995.  We
developed these estimates, using the best data available, because
current information on the total amount of COP that agencies paid in
third-party cases was not readily available. 

OWCP estimated that approximately $1 million per year could be
recovered for COP in third-party cases.  OWCP based its estimate on
one of the class action suits that required the government to repay
COP it had previously recovered following the settlement of
third-party claims.  According to OWCP, the first of the class action
suits, Evich, was the most representative of the federal employee
population as a whole.  Evich covered employees in the Ninth Circuit
(several western states) who worked for 20 different departments and
agencies, including the Postal Service.  Also, of the three suits,
Evich covered the longest period (6.5 years).  OWCP used (1) the
amount of COP returned to the employees after the suit was settled,
(2) the percentage of the federal employee population in the Ninth
Circuit, and (3) its estimate of total COP paid in 1993, to project
an estimate of governmentwide COP that could be recovered in
third-party cases each year. 


   COSTS TO OBTAIN REFUNDS OF COP
   SHOULD BE MINIMAL
------------------------------------------------------------ Letter :5

According to officials and staff from Labor and the Postal Service,
additional costs and effort to obtain refunds of COP in third-party
cases would be minimal.  It would involve reinstating the procedures
previously used to obtain employee refunds of compensation benefits
and COP. 

Currently, OWCP gives employees a statement showing the amount of
compensation benefits it paid to them or on their behalf and the
amount of the third-party recoveries employees are to remit to the
federal government.  Before 1986, the amount of COP was obtained from
the employing agencies and included on this statement for calculating
the net amount to be remitted.  An OWCP official told us that some
agencies have a separate COP code in their payroll systems that would
allow the agencies to easily determine the amount of COP paid to
their employees.  The OWCP official said that agencies that do not
specifically track COP would have to determine the COP amount from
the individual employee's payroll records. 

The procedure is similar for cases the Postal Service administers
pursuant to its 1980 agreement with OWCP.  The Postal Service obtains
the amount of compensation paid to or on behalf of its employees from
OWCP and gives its employees a statement similar to the one OWCP
gives non-Postal employees.  Before 1986, the Postal Service included
the COP amount on the statement to calculate the net amount employees
were to remit.  A Postal Service official told us that COP amounts
are readily available for individual employees because the Postal
Service has a separate COP code in its payroll system. 

The amount of effort needed to obtain COP information would not
appear to place unreasonable burden on agencies that do not
specifically track it.  Information from the class action suits
indicated that the number of employees per agency for which COP data
were needed was small.  Only 6 of the 42 non-Postal Service agencies
covered by the class action suits had received refunds of COP from
more than 50 employees over a period of 35 to 78 months.  We have no
reason to believe that the number of third-party cases has changed
dramatically since settlement of these class action suits, or that it
will change dramatically in the future.  Therefore, on an annual
basis, we would expect that most agencies would have to identify COP
costs in third-party cases for only a small number of employees each
year. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Current treatment of COP for third-party recovery purposes does not
(1) prevent employees from receiving COP benefits as well as damages
from third parties for the same injury (in effect, a double recovery)
or (2) minimize the cost of FECA to the federal government.  Because
FECA distinguishes between COP and compensation benefits, the
government can only recover amounts paid for compensation benefits
when federal employees' injuries are caused by third parties.  When
Congress enacted the COP provision, it was not clear whether Congress
specifically intended that COP should not be recovered in third-party
cases. 

To prevent double recoveries of COP benefits and third party damages
and to minimize the federal government's costs of FECA, Congress
would need to redefine COP so that OWCP could include it in the
amount of compensation benefits for which employees are required to
reimburse the government when they recover damages from third
parties.  While some employing agencies would need to spend more time
than others to identify COP benefits paid to individual employees,
the Postal Service, which is the agency most likely to have the most
third-party claims, and some other agencies already have the
capability to identify COP amounts for individual employees.  Also,
available evidence suggests that other agencies could establish
cost-effective procedures to identify COP in the relatively few cases
they would encounter. 


   RECOMMENDATION TO CONGRESS
------------------------------------------------------------ Letter :7

To preclude employees from, in effect, receiving double recoveries
and to help reduce the costs to the federal government of employees'
work-related injuries caused by third parties, we recommend that
Congress amend FECA to expressly provide for refunds of amounts paid
as COP when employees receive third-party recoveries.  Subsection (e)
of 5 U.S.C.  8118, the statutory provision that authorizes COP, could
be amended to provide that COP shall not be considered compensation
"except for the purpose of refunds to the United States from third
person recoveries pursuant to section 8132 of this title." In
addition, to ensure that refunds of COP are returned to the employing
agency that paid the COP, section 8132 could be amended to provide
that amounts refunded shall be credited to the Employees'
Compensation Fund "except for continuation of pay under section 8118
of this title, which shall be credited to the employing agency that
paid it."


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

We requested comments on a draft of this report from the Secretary of
Labor and the Postmaster General or their designees.  Labor agreed
with our conclusions and recommendation.  In an April 21, 1995,
letter (see app.  II), Labor's Assistant Secretary for Employment
Standards said Labor believes that returning to the practice of
recovering COP and thereby avoiding double recoveries is equitable
and a promising way to lower federal government costs. 

We met with the Postal Service's Vice President/Controller and other
officials on April 10, 1995, to obtain Postal Service's formal
comments on our draft.  The Postal Service agreed with our findings,
conclusions, and recommendation.  Further, Postal Service officials
agreed to implement a procedure to obtain COP refunds in third-party
cases if FECA is amended as we recommend. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to interested congressional
committees, the Secretary of Labor, the Postmaster General, and the
Director of the Office of Management and Budget.  Copies will also be
made available to others upon request. 


The major contributors to this report are listed in appendix III.  If
you have any questions about this report, please contact me on (202)
512-3511. 

Timothy P.  Bowling
Associate Director
Federal Human Resource Management
 Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

At the request of the former Chairman and Ranking Minority Member of
the Subcommittee on Regulation and Government Information, Senate
Committee on Governmental Affairs, we reviewed several issues
relating to FECA.  This Subcommittee was eliminated in early 1995
when the new Congress reorganized some Senate committees.  However,
as agreed with the former Chairman's staff, we continued to review
the issue of recovering COP in third-party liability cases.  Our
objectives were to determine the costs and benefits of the federal
government reestablishing its former practice of obtaining refunds of
COP when employees recover damages from responsible third parties
including (1) the estimated annual amount of COP that the government
could recover and (2) whether recoveries would be offset by the
administrative costs incurred. 

To achieve our objectives, we interviewed officials and staff from
OWCP, Labor's Office of the Solicitor, and the Postal Service.  In
addition, we reviewed the legislative history of FECA, specifically
the provisions on COP and third-party liability.  We also reviewed
the (1) ECAB and Court of Appeals decisions that disallowed the
government's practice of obtaining COP refunds and (2) class action
suits filed by federal employees to compel the government to return
COP that the employees had previously refunded to it.  We discussed
with Labor attorneys whether and how FECA could be amended so that
COP could be included in refunds from third-party recoveries. 

To determine the annual amount of COP that the government could
recover, we developed three estimates and reviewed an estimate made
by OWCP.  For our estimates, we used information (1) from the class
action suits filed by employees who had refunded COP in the past, (2)
on Postal Service COP recoveries in third-party cases during fiscal
year 1985, (3) from the Postal Service on its COP disbursements in
third-party cases during the first half of calendar year 1994, and
(4) on federal General Schedule pay increases from 1986 to 1995. 

Using information from OWCP on (1) the total amount of COP that was
to be refunded in each of the three class action suits and (2) the
amount of COP to be refunded to employees of each agency involved in
each of the three class actions, we estimated that Postal Service
employees had received about 70 percent of the total amount of COP
refunded.  Because (1) these three suits presumably covered every
employee that OWCP identified as having reimbursed the government for
COP in third-party cases during some period between August 1979 and
March 1986 and because (2) the federal employee population, including
the proportion employed by the Postal Service, remained relatively
constant from 1986 to 1993, we assumed that Postal Service employees
would continue to account for about 70 percent of all COP paid in
third-party cases. 

For our first estimate of the annual amount of COP that could be
recovered, we obtained from the Postal Service the amount of COP it
paid in third-party cases for the first 6 months of calendar year
1994.  Using these data and the 70-percent figure referred to in the
preceding paragraph, we estimated that annual recoveries of COP could
be $1.3 million. 

For the second estimate, we used information on COP recovered by the
Postal Service in fiscal year 1985 and the rate of federal General
Schedule pay increases since 1985.  Using these data and the
70-percent figure, we estimated that the government could recover
about $1.9 million of COP annually. 

Our final estimate was based on (1) the amounts of COP returned to
employees involved in the three class action suits and (2) federal
General Schedule pay increases since 1985.  Using these data, we
estimated COP recoveries of $2 million per year. 

To assess administrative costs that would be incurred in recovering
COP in third-party cases, we reviewed OWCP and Postal Service
procedures manuals.  We also discussed with OWCP and Postal Service
officials and staff how third-party cases are currently handled and
how COP refunds were handled in the past. 

We did our work between March 1994 and February 1995 in accordance
with generally accepted government auditing standards. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
LABOR
=========================================================== Appendix I



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

Larry H.  Endy, Assistant Director, Federal Human Resource
 Management Issues
Edward R.  Tasca, Assignment Manager
Diane N.  Morris, Evaluator-in-Charge


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:2

Jill Poses Sayre, Senior Attorney

