Substantial fault and misconduct principles from unemployment law to come to workers’ compensation

A Department-sponsored bill from the Workers’ Compensation Advisory Council, SB536, will make the following changes to workers’ compensation law:

Employees suspended or terminated for misconduct or substantial fault This bill provides that an employer is not liable for temporary disability benefits during an employee’s healing period if the employee is suspended or terminated from employment due to misconduct, as defined in the unemployment insurance law, or substantial fault, as defined in the unemployment insurance law, by the employee connected with the employee’s work.

The unemployment insurance law defines “misconduct” as action or conduct evincing such willful or wanton disregard of an employer’s interests as is found in 1) deliberate violation or disregard of standards of behavior that an employer has a right to expect of his or her employees; or 2) carelessness or negligence of such degree or recurrence as to manifest culpability, wrongful intent, or evil design in disregard of the employer’s interests or to show an intentional and substantial disregard of an employer’s interests or of an employee’s duties and obligations to his or her employer.

The unemployment insurance law defines “substantial fault” as acts or omissions of an employee over which the employee exercised reasonable control that violate reasonable requirements of the employee’s employer, but not including minor infractions, inadvertent errors, or failure to perform work due to insufficient skill, ability, or equipment.

In other words, temporarily disabled employees lose their workers’ compensation benefits when they lose jobs because of misconduct or substantial fault (which by the way also cancels out their unemployment benefits). Given this two-fer, employers will have an extra incentive for discharging employees who suffer a temporary workplace injury. Not only are the employees disqualified from receiving unemployment benefits, but they also lose their workers’ compensation benefits. Given how easy it is to find substantial fault (the Commission has found mere negligence to qualify as substantial fault), workers’ compensation benefits for temporary injuries are likely to become exceptionally rare under this new provision. YIKES!

NOTE: As seen in the 21 October 2015 minutes of the advisory council meeting in which this change — Management Proposal 11 — was discussed, these concerns about the impact of this disqualification were not new. In these minutes, however, these concerns were made in regards to misconduct only. Substantial fault was not discussed.

Why employer UI taxes are down: concealment and substantial fault

A previous post noted that unemployment taxes for employers are going down because the reserve fund’s cash balance is currently and expected to remain more than $500 million.

This success is remarkable, especially since it did not come about because employers’ taxes have been raised substantially. To be sure, the higher unemployment during the Great Recession led to the highest tax schedule — Schedule A — being implemented. And, for three years, 2011 to 2013, the FUTA tax credit available to employers was reduced.

But, recall the UI debt hole Wisconsin was in during the Great Recession. In March 2011, Wisconsin owed just over $1.6 billion because of borrowing to cover unemployment benefits being paid out. Only eleven other states ever owed more during this recession.

One point six billion dollars is a big hole to climb out of. As noted in a recent GAO report, some states reduced the number of weeks claimants were eligible for benefits as a way to fix their UI debt problems. In short, rather than making employers pay more, these states limited the ability of claimants to collect benefits in the first place. With less benefits being paid out, the taxes employers paid went further.

Other than the introduction of a waiting week before unemployment benefits begin being paid out, Wisconsin did not shorten the total weeks of unemployment eligibility. But, Wisconsin did other things on the benefit side of the equation that have starkly reduced the amount of benefits being paid out to claimants.

As noted previously, Wisconsin has been exceptionally aggressive on charging claimants with concealment and is proposing both increased penalties and stricter compliance standards to be applied to claimants that would effectively charge them with fraud when making honest mistakes on their claims. As the Department’s own fraud report shows, DWD has been taking in over $20 million a year the past two years in over-payment collections alone. Forfeiture penalties and charges against future unemployment benefits add significantly to the amounts flowing back into the reserve fund from claimants.

But, forfeiture over-payments and collections only tell part of the story. Department staffers have publicly noted that benefit payments are now at historically low levels. Indeed, at the May 19th Advisory Council meeting it was noted that Wisconsin has not seen such low levels of benefit payments since 2000, fifteen years ago. The big question is why benefit payments in Wisconsin are so low right now.

A look at 2013 and 2014 financial reports to the Advisory Council show large declines in 2014 in benefits being paid to claimants. The benefits charged to taxable employers for the past three years when employees were discharged are:

2012 - $788,019,106.15

2013 - $714,257,663.70

2014 - $580,681,613.52

The ratio of current year benefit payments to benefits paid the previous year, are 0.91 in 2013 but 0.81 in 2014. In other words, there was a nearly 20% decline in benefit payments in 2014 when compared to 2013, nearly double the decline in benefit payments from 2012 to 2013.

Benefits being paid to employees who quit also declined sharply in 2014.

2012 - $85,799,497.23

2013 - $81,861,854.13

2014 - $69,388,417.56

The 2013 ratio of benefit payments relative to the previous for quits was 0.95. That ratio in 2014 declined to 0.85, nearly three times the decline seen in 2013.

These declines in benefit payments in 2014 directly arise from changes in unemployment law contained in the 2013 budget act2013 Wis. Act 20 — regarding the elimination of numerous quit exceptions and the adoption of a new, substantial fault standard for discharges (see this previous post about these changes being included by the Joint Finance Committee in the budget bill). Understand that the original estimates presented to the Joint Finance Committee for these changes in unemployment law were a reduction of $14.1 million in benefit payments during the first fiscal year and a $23.1 reduction in benefit payments during the second fiscal year. As noted above, the actual decline for quits alone in 2014 was just over $12 million, and for discharges the decline was approximately $134 million.

NOTE: The financial reports given to the Advisory Council lack specific data about the number of claims at issue. The recent report about the activities of the Advisory Council, however, states that the new substantial fault standard led to “4,654 denied cases in 2014. See p.7 of the activities report. Using the average claim duration of 15.3 weeks and the average weekly benefit amount of $285 from the Department’s 2015 financial report, see pp. 37 and 38, each substantial fault disqualification amounted to $4,360.50. Adding up all of the denied cases in 2014 means that $20,293,767 in benefits were NOT paid out that year, $4 million more than what the Department estimated in its 2015 financial report, see p.33 of the financial report.

Because the decline in benefit payments is significantly more than what can be pieced together from available data, using a ratio of benefit payments from one year to the next to track these changes indicates at least how extraordinary the declines in 2014 were and, as indicated below, provides a mechanism for predicting what will happen in 2015 using currently available data.

Estimates for 2015 show that the decline in benefits being paid pursuant to discharges will continue. Using data for the first four months of each year, the total amount of benefits estimated to be paid in 2015 to discharged employees will be just over $480 million, $100 million less than in 2014. And so if current trends continue, the estimated level of benefits going to discharged employees in 2015 will only be 83% of the already record low amount that went to discharged employees in 2014.

On the other hand, estimated benefit payments in 2015 for employees who quit will only be $3 million less from what claimants who quit received in 2014. That is, benefits paid to employees who quit are expected to be within 97% of the 2014 numbers. Accordingly, it appears that the application of the new quit standards to claimants has stabilized and subsequent declines in benefits pursuant to quits are unlikely.

The Department has yet to acknowledge the impact the substantial fault disqualification has had on the benefits being paid out to claimants. The Department’s estimates set forth in its 2015 annual Financial Outlook Report call for a $16 million reduction in benefits to discharged employees because of substantial fault (much less than the $100 million estimated here for 2015) and an $11.5 million reduction in benefits through the elimination of various quit exceptions (nearly $9 million more than estimated here for 2015 but similar to the decline in quit benefits seen in 2014). See pp. 32-3 of the report.

These estimates severely under count the impact substantial fault has had on claimants. In its Financial Outlook Report, the Department presents for the first time a public description of the new substantial fault standard:

Substantial fault essentially means that if an employer establishes a reasonable job policy to which an employee can conform, failure to conform constitutes substantial fault.

See p.33 of the report. According to the Department, then, employees are disqualified whenever they fail to follow a reasonable employee policy. Given how steep the decline in benefits has been for discharged employees in 2014 and the first four months of 2015, it is obvious that the Department has begun applying this broad conception of substantial fault.

And so, with less money being paid out as unemployment benefits, employers’ taxes could that much more quickly fill the hole in the reserve fund created by the Great Recession. There simply has been no need in Wisconsin to reduce the number of weeks claimants are eligible for benefits when those claimants are likely to be disqualified in the first place from receiving any benefits at all.

Finally, it should be noted that even though Wisconsin now has a positive reserve fund balance, the unemployment fund is still not all that healthy. Based on standard UI fund metrics, a recent Trust Fund Solvency Report shows that Wisconsin still fares about as well as most other states do — that is, not so well (see p.56 of the report). The fund’s solvency is rated at 0.13 and a minimum of 0.60 is needed for Wisconsin to be eligible for interest free loans to cover future benefit payments. For how Wisconsin compares to other states, see p.59 of the solvency report. Among mid-western states, Wisconsin fares worst except for Indiana and Ohio, which both still have outstanding debt. Presentations by the Department to the Advisory Council have described the reserve fund’s financial problems in detail. See, e.g., the presentation contained in the Advisory Council activities report, pp.16-44. But, raising employers’ unemployment taxes appears to be unnecessary when benefit payments to claimants continue to decline markedly.

Substantial fault equals negligence

In just two weeks time (a record turnaround), the Labor and Industry Review Commission issued a decision in the substantial fault case I just posted about a few days ago.

The decision deserves careful reading. There is no surprise here that the Commission found no misconduct. In failing to secure a wheelchair passenger, the Commission explained, the “employee did not willfully disregard this responsibility; it was an act of negligence” and that this “negligence was not of a severity to willful disregard of the employer’s interests.”

But, the Commission did find that this negligence constituted substantial fault. The Commission maintained in this decision: (1) that the reasonableness of the employer’s requirements is established as articulated (that is, on its face) and (2) that the employee has to demonstrate that the action at issue was beyond his or her reasonable control. For the Commission, the employee failed to satisfy this requirement. “The evidence does not show that the employee’s failure was a minor infraction, that the error was merely an inadvertence, of that she lacked sufficient skill, ability or equipment to perform her responsibility.”

There are two problems here with the Commission’s reasoning. First, the Commission is placing the burden of proof on claimants to demonstrate they satisfy one of the three caveats to avoid a finding of substantial fault rather than having employers first show that the action at issue truly is something the employee should be expected to have reasonable control over. Second, and more troubling, the Commission is holding here that a negligent act disqualifies someone from unemployment benefits. As a result, this decision could possibly threaten the tax credits employers currently qualify for.

There are a few but very important federal requirements that state unemployment systems must satisfy in order for the employers in those states to qualify for tax credits. See 6 U.S.C. § 3302 (federal tax credits for employer’s contributions to state unemployment funds). One of these requirements is that:

(10) compensation shall not be denied to any individual by reason of cancellation of wage credits or total reduction of his benefit rights for any cause other than discharge for misconduct connected with his work, . . .

6 U.S.C. § 3304(a).

If the Secretary of Labor finds that a state is not meeting this requirement, then that lack of compliance means the tax credit goes away. So, the Commission, by holding that substantial fault is in actuality substantially less stringent than the misconduct standard, may have effectively ended a vital tax savings for employers. For a measure originally intended to reduce the unemployment benefits being paid out, the new substantial fault standard may now cost employers much more through higher taxes.

Wisconsin’s new substantial fault standard

I just filed a brief with the Labor and Industry Review Commission about the new substantial fault standard. Here are the relevant portions:

As amended by 2013 Wis Act 20, Wis. Stat. § 108.04(5g)(a) defines substantial fault as:

those acts or omissions of an employee over which the employee exercised reasonable control and which violate reasonable requirements of the job but shall not include:

1. Minor infractions of rules unless such infractions are repeated after a warning was received by the employee,
2. inadvertent mistakes made by the employee, nor
3. Failures to perform work because of insufficient skill, ability, or equipment.

As noted previously, these three caveats mirror to a great extent the clarifications from Boynton Cab. As discussed in greater detail below, treating these caveats as exceptions or clarifications significantly affects how this new standard will be applied.

When substantial fault was initially proposed, the Department of Workforce Development (“DWD” or “Department”) explained “that the current misconduct standard within Wisconsin law was too generous in providing benefits to employees who should not qualify for benefits” and that the new substantial fault standard:

creates a lower standard for disqualifying a claimant but then places some restrictions on the applicability of the lower standard. The proposal also provides further clarification regarding what constitutes misconduct. It is hoped that this strikes the right balance over the concerns of the employer community and claimants who seek benefits.

Department Proposal D12-01 at 5 (available at; see also Department’s Examples and/or Explanation for Each Proposal at 2 (examples of discharges considered to be substantial fault include an employee discourteous to a customer after warnings, an employee sleeping on the job after warning and aware of policy prohibiting sleeping when on-duty, and an employee who fails to do his or her job duties and tells the employer otherwise (available at But cf. Victor Forberger, “Memorandum RE: 27 November 2012 DWD legislative proposals to Advisory Council” (13 January 2013) at 6-10 (examples and provisions examined for when substantial fault would apply are for the most part already considered under case law as disqualifications for misconduct) (available at, posted at “Memo on DWD proposed UI changes” (available at .

The Advisory Council rejected this proposed change and instead worked out new misconduct language to clarify that longstanding disqualification. See blog posting “Advisory Council Meeting — 1 April 2013” (available at (council declined to adopt proposed substantial fault standard but recommended adding various examples of misconduct). The Department never acted on the Advisory Council’s recommendations, however. And, on 29 May 2013 the Joint Finance Committee added the rejected substantial fault and misconduct standards to the budget bill that eventually became 2013 Wis Act 20. See blog posting “Advisory Council — 2 May 2013 meeting — and legislative actions today” (available at and blog posting “JFC UI amendments” (available at (JFC motion to amend budget bill included various unemployment financing provisions and rejected substantial fault, misconduct, and quit provisions; DWD drafted bills that eventually became 2013 Wis Act 36 never included the Advisory Council’s agreed-upon misconduct and quit proposals). Accordingly, these changes to unemployment law went against the express recommendations of the Advisory Council.1

As the Commission can only act when presented with relevant cases, it has had limited opportunities to clarify how this new substantial fault standard will be applied. From the cases decided so far, it appears that the Commission has focused on the three caveats as exceptions. See, e.g., the Commission’s on-line outline of decisions that includes a general category for substantial fault decisions and then three additional categories for each of the three caveats, labeled as exceptions (available at This categorization of substantial fault cases is a mistake as it necessarily shifts the burden of proof in these discharge cases prematurely to claimants who have to demonstrate whether the exceptions apply to them rather than first requiring employers to satisfy their burden of proof that their expectations are reasonable and that the action or inaction in question is something over which employees exercise reasonable control. Kansas City Star Co., Flambeau Paper Co. Div. v. Dep’t of Industry, Labor & Human Relations, 60 Wis.2d 591, 602, 211 N.W.2d 488 (1973) (an employee is presumed eligible for unemployment benefits, and the party resisting payment must prove disqualification), see alsoBoynton Cab, 237 Wis. at 243, 296 N.W. at __ (a challenging employer has the burden to show disqualifying misconduct). Accordingly, the Commission should instead read the caveats as clarifications of what (1) the reasonable employer expectations entail and (2) the scope the conduct over what the employee exercises reasonable control. Indeed, this reading of the statute comports with how the Commission handles misconduct cases under Boynton Cab: the clarifications to the misconduct standard in Boynton Cab are not considered as exceptions but rather as indicia of circumstances where an employer has failed to satisfy its burden of proof. Herr v. McEssy Investment Co., UI Hearing No. 10602407MW (27 August 2010) (reviewing case law to explain that finding of misconduct is more than just violation of employer policy but also requires examination of whether the employee’s actions in the circumstances at hand rise to the level of being intentional and unreasonable interference with the employer’s interests).

This shift in focus from exceptions back to clarifications can be seen in Campo v. Park Towne Management Corp., UI Hearing No. 14000528MD (27 June 2014), where the Commission found that a claimant was not disqualified for her mistakes in doing her job. For the Commission, those mistakes were not rule violations per se but either “inadvertent errors” over actions for which she had not been previously warned or performance mistakes since the claimant herself never demonstrated a level of competence to do the work in the first place. It is questionable whether many claimants will be happy with such a result, as they are essentially having to show their inability to perform a job in order to win unemployment benefits. On the other hand, if the Commission had initially determined whether the employer had first demonstrated whether its expectations were reasonable or not and whether the employee exercised reasonable control over the job duties in question, the decision would have led to the same result without having to label the claimant as lacking competence to perform her job. In Campo, the claimant’s problems existed since she was hired, so (1) there was no showing by the employer that the claimant had been presented with a clear, understandable guidelines about her job duties, and (2) the employer had failed to demonstrate that the job duties in question could be met prior to the discharge. As a result, the employer failed to meet its burden of proof either that its expectations were reasonable or that the employee had the skills, ability, and equipment to carry out those ambiguous job duties.

So, the decision to disqualify a claimant for unemployment benefits because of substantial fault turns initially on two issues: (1) whether the employer’s expectations are reasonable and (2) whether the employee has the skills, abilities, and equipment to exercise reasonable control to accomplish those job duties.

An employer’s reasonable expectations of its employees necessarily requires that those expectations not only be objectively reasonable but also known to the employee and uniformly enforced.2 An employer can satisfy this knowing requirement by either a warning to the employer or a written or oral policy presented to the employee. In Frederick v. Vista Int’l Packaging LLC, UI Hearing No. 14601230MW (30 May 2014), an employer orally informed employee three times about employer expectations that employee control his behavior and follow directions without argument, so prior warning to not argue were unnecessary for substantial fault to be found. The employer established that the employee knew and understood specifically what the employer expected of him. Id., cf. Robinson v. Scan-Pac Mfg Inc., UI Hearing No. 14601571MW (27 June 2014) (no violation of a reasonable expectation occurred when employee discharged for absenteeism because employee had previously completed forms for requesting time off and had no prior attendance warnings). Once that burden is met by the employer, only then should the burden of proof shift to the employee to show that an actual warning of some kind was still needed for substantial fault to be found (for example, an employee could indicate that a supervisor informed the employee that the employer expectation at issue would no longer apply to or count against the employee after three months and those three months had since lapsed).

The employer should also be required under its burden of proof in discharge cases to demonstrate that the employee exercises reasonable control over the action or inaction at issue. Hence, the employer must first present evidence that the employee has the skills, knowledge, ability, and equipment to exercise that reasonable control. See Rolkosky v. Marinette Marine Corp., UI Hearing No. 14401261EC (30 May 2014) (employee guilty of substantial fault after employer told employee to not sit idle and employee, when trapped in room, had the ability to yell for help or use a telephone but instead chose to wait until the door was opened by someone).3 An employee, for example, should not have the burden of proving that she was late to work because of a blizzard in order for one of the exceptions to apply. Rather, the employer should first have the burden of showing that the employee could still have arrived on-time to work because she had the ability and equipment to drive in extreme weather. If the employer then presents evidence to show that all of its other workers managed to navigate through the snow in order to arrive at work on-time or that the claimant had previously driven through similar blizzards, only then should the claimant have to demonstrate that this particular blizzard presented circumstances relating to her abilities (a broken arm prevented use of the manual transmission in her four-wheel vehicle driven during previous blizzards) or the equipment available to her (the four-wheel vehicle was at the repair shop) or that inadvertent mistakes (a slide-out onto the side of the road necessitated help from a tow truck) led to her late arrival at work.

1Counsel for Ms. CLAIMANT lacks long-term knowledge of Wisconsin’s unemployment law to know whether the legislature has ever before enacted changes to unemployment law that the Advisory Council had previously rejected (as opposed to just modifying those recommendations).

2This uniformity requirement is not currently being examined by the Department, appeal tribunals, or the Commission. Rather, employer’s policy are accepted as presented as prevalent, communicated to all, and completely understood and applied in the same way by all persons. As a result, the reasonableness of a policy is presumed without any evidence to support such a presumption. This failure to ask basic questions of employers about how their expectation has been applied in the past to other employees has led to hearing records, as demonstrated in this case, where basic information about the requirement is missing. Here, for instance, basic questions about how the wheelchair tip policy was applied by the employer generally, what training was made available, what role attendants and volunteers had relative to drivers in effectuating the policy, how the safety of other passengers mattered and was handled, and how the policy changed over time were not broached (the employer witness testified as to the importance of the wheelchair tip policy and how it was put in place two years ago, synopsis at 3, but there is no explanation of how the policy actually changed from what existed before and what the employer does to implement the policy currently). By simply having employers meet their statutory burden of proof by showing how a policy in question has been developed and applied, the Commission would gain key evidence about the mechanics and application of the policy.

3Following the shifting burden of proof being described here, Rolkosky could have over-turned a finding of substantial fault by showing that his voice was hoarse because of illness, the door was too thick for sound to travel through, or that the telephone was inoperative.

Memo on DWD proposed UI changes

January 2013

Here is the lengthy (50 pp.) analysis of proposed changes DWD submitted to the Advisory Council in late November/early December 2012 regarding the state’s unemployment law. The proposed changes were substantial and ended up for the most part being adopted. This memo was completed in early January 2013.

UPDATE (17 Sept. 2016): Note that copies of this memorandum were also provided to members of the Advisory Council and posted on the labor and employment listserv for the Wisconsin bar.