DEC 07 2008

Labor Code Section 4850 and Perverse Incentives

Miscellaneous

California Labor Code Section 4850 requires that police officers and firefighters must be paid 100 percent of their pre-injury wage for up to one year while temporarily disabled (most other workers are limited to two-thirds of their salaries up to a maximum limit). This benefit is tax free such that temporarily disabled public safety officers make more money by being temporarily disabled than by working. This benefit costs California’s state and local governments approximately $500,000,000 per year.

Section 4850 provides a perverse incentive to game the system. Indeed, a common tax minimization/income maximization tactic for public safety employees in California is to claim temporary disability during their final year of service before retirement and, upon retirement, to convert the temporary disability claims into permanent disability claims. These permanent disabilities enable permanent tax-free benefits equal to half of the claimants’ salaries. This tactic enables a tax-free and work-free final year of “work” before retirement and a permanent full retirement check wherein half of earnings are permanently tax-free.

It is befuddling to me that this perverse incentive continues to exist.

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