A commutation is an agreement between a worker and insurer to commute or ‘buy-out’ any future liabilities for weekly compensation payments and medical, hospital and rehabilitation expenses associated with the injury, through the payment of a lump sum to the worker.
Generally, commutations are used to buy-out the entitlements of long-term workers compensation recipients, whose entitlements are not in dispute. For some workers, the ability to successfully commute future entitlements and exit the workers compensation system can be beneficial to their health.
Workers and employers are under no obligation to accept or make an offer to commute liability.
Insurers should enter into commutation negotiations in good faith and undertake all negotiations in a transparent and fair manner.
Note: Unlike most workers in NSW, coal miners retain the right to a redemption under the Workers' Compensation Act 1926 (1926 Act).
- Weekly payments to a dependent child of a deceased worker cannot be commuted.
- A worker with a catastrophic injury cannot commute their medical, hospital and rehabilitation entitlements. They can commute their weekly payments. Refer to Part 9 of the Workers compensation guidelines for more information.
Overview of the process
Broadly, there are four steps in the commutation process:
- The worker and insurer agree to both the commutation and the amount
- One of the parties applies to SIRA with supporting documents to show that all the pre-conditions have been met (see below)
- SIRA certifies that all pre-conditions have been met and issues a commutation certificate to the parties
- The Workers Compensation Commission (the Commission) registers the commutation agreement and the commutation then becomes payable.
What are the pre-conditions?
The pre-conditions to commutation are set out in section 87EA of the Workers Compensation Act 1987 (1987 Act). They include:
- the worker’s injury has resulted in permanent impairment of at least 15 per cent, assessed as provided by Chapter 7, Part 7 of the Workplace Injury Management and Workers Compensation Act 1998 (1998 Act)
- compensation for permanent impairment has been paid
- it has been more than two years since the worker first received weekly payments for the injury
- all opportunities for injury management and return to work have been fully exhausted
- the worker has received weekly payments regularly in the preceding six months
- the worker has an existing and continuing entitlement to ongoing weekly payments
- weekly payments have not been terminated as a result of the worker not complying with their return to work obligations (as per section 48A of the 1998 Act).
Making an application for SIRA certification
Once the insurer has reached an agreement with the worker on the amount of the commutation, one of the parties must apply to SIRA for certification.
Using the commutation application form and providing supporting information, the parties must show that all the commutation pre-conditions have been met.
SIRA will only issue a certificate if satisfied that the pre-conditions have been met. If issued, the certificate will be sent to all parties.
The commutation agreement and registration by the Commission
Independent legal and financial advice
Before entering into a commutation agreement, a worker must receive independent legal advice and the legal practitioner must certify in writing:
- that he or she has advised the worker on the full legal implications of the agreement, and
- on the desirability of the worker obtaining independent financial advice before they enter into the agreement.
The worker must confirm in writing that he or she has been given and understands the legal advice and the recommendation to obtain financial advice.
All commutation agreements must be registered with the Commission. A commutation agreement has no effect until it is registered with the Commission.
The Registrar of the Commission can (either at the request of a party or independently) refer the agreement to the Commission for review. The Registrar is not to register the agreement if the Commission considers that the agreement is inaccurate or that the lump sum is inadequate.
Cooling off period
A worker has a 14-day ‘cooling off’ period after entering into the commutation agreement. They can withdraw from the agreement by giving notice in writing to the insurer within that period.
Insurers do not have a cooling off period.
Once the commutation is registered, the agreed amount is payable within seven days (or within a longer period if the agreement provides one). Insurers should not unreasonably extend the period of time for payment.
Interest is payable on any late payment and any interest payable is recoverable as a debt in a court of competent jurisdiction.
- Additional requirements apply with respect to commutation of weekly payments for uninsured employers. See section 146 of the 1987 Act.
- Redemptions under section 15 of the Workers' Compensation Act 1926 (1926 Act) relating to injuries sustained before 30 June 1987 are dealt with differently and workers should seek independent legal advice.
Commutation when the worker is legally incapacitated
If a worker is legally incapacitated because of their age or mental capacity, liability may be commuted to a lump sum as determined by the Commission.
The Commission has to be satisfied that the termination of liability is in the best interests of the worker having regard to:
- any dispute as to liability under the 1987 Act
- the injury, age, general health and occupation of the worker
- the worker’s diminished ability to compete in an open labour market, and
- other benefits the worker may be entitled to from any other source.