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Michigan No-Fault wage loss benefits cover both wages and S corporation profits

December 24, 2012 by Steven M. Gursten

Lost wages based on ‘loss of income,’ thus ‘whole income’ must be considered – not just ‘wages’

There have been arguments for years as to whether corporate profits of a business can be calculated for purposes of calculating wage loss under Michigan’s No-Fault Act.  Well, auto accident victims who are seriously injured and cannot return to work have now won an important victory in the sometimes ongoing battle to collect the wage loss benefits they’re entitled.

In a unanimous Michigan Court of Appeals ruling, it was announced that No-Fault wage loss benefits calculations must take into account the auto accident victim’s pre-accident wages and the pre-accident profits he received from the S corporation he owned and of which he was an employee.

In Brown v. Home Owners Insurance Company, the auto accident was both the owner/sole shareholder of a subchapter S corporation and one of the S corporation’s employees. Because his accident-related injury disabled him from working, he applied for wage loss benefits through his No-Fault auto insurer, Home Owners Insurance Company.

The Brown victim urged that his wage loss benefits should be based on both his wages (as reported in his W-2 forms from the S corporation) and profits from the S corporation (as reported in his K-1 tax forms) which were paid to him in the form of distributions or flow-through earnings.

Home Owners agreed to pay based on W-2 wages, but balked at basing No-Fault wage loss benefits on S corporation profits.

The trial court disagreed with Home Owners on the S corporation profits issue, noting:

“[T]he no fault act defines work loss benefits as consisting of loss of income from work an injured person would have performed during the first three years after the date of the accident if he or she had not been injured.”

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“The legislature could have easily limited the available benefits to loss of wages or loss of W-2 wages, but they chose not to.”

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“Under the plain meaning of the statute, plaintiff is entitled to benefits based on his whole income, not benefits based solely on his preaccident W-2 wages.”

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On appeal, the Michigan Court of Appeals in Brown agreed with the trial court’s assessment and ruled in the auto accident victim’s favor:

“[The No Fault Act] does not appear to limit the benefits that it provides to an injured person’s lost wages, but rather includes other sources of income from work as well. Indeed, the Legislature chose the term ‘loss of income from work’ rather than ‘loss of wages’ as the measure of damages.”

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“[T]he profit generated by a subchapter S corporation is included in the work loss calculation for benefits payable under MCL 500.3107(1)(b) …”

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“Under the circumstances here where the subchapter S corporation was operating at a profit and where plaintiff was receiving and paying tax on flow through income from the corporation, to not treat all income as loss of income from work would have the result of placing plaintiff in a worse position than he would have been in had the accident not occurred.”

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“This result is consistent with the overall purpose of the no-fault act, ‘to place individuals in the same, but no better, position that they were in before their automobile accident.’”

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Related Information:

Updated Michigan wage loss rates

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