Follow the money: How experts calculate lost earnings damages
Plaintiffs seek damages for lost earnings in cases ranging from wrongful termination to wrongful death. When calculating such damages, financial experts consider several components, including base earnings, retirement benefits and fringe benefits.
Begin with base earnings
The initial focus in a lost earnings claim typically falls on the plaintiff’s base earnings — the earnings rate for a specified year from which lost earnings will be extrapolated. Your expert will need several types of data to compute a figure for base earnings, including:
- Employer records,
- Employee pay stubs,
- Income tax records,
- Social Security records, and
- Census information or the earnings of comparable employees in the industry or company.
Information related to a plaintiff’s seniority, worklife expectancy, health history and declines in productivity can provide additional insight if his or her earnings record fails to show regular annual increases.
It also may be necessary to adjust for seasonal variations and sick pay. One-off, nonrecurring payments, such as a nonperformance-based bonus or a year with unusually high earnings, can skew base earnings, as well.
Review retirement plans
With defined contribution plans, the employer contributions are regarded as a portion of lost earnings in the years the contributions would have been made if not for the wrongful act. Instead of projecting the postretirement benefits to be paid, the expert calculates the sum of the employer contributions that would have been made.
When dealing with defined benefit plans, the expert may need to project the actual benefit stream following the plaintiff’s retirement. If the benefit depends on the worker’s earnings, the size of the loss will depend on the plan’s details, along with the plaintiff’s years of service, salary levels, expected retirement date and life expectancy.
Figure out fringe benefits
To determine compensation for fringe benefits, experts compare the benefits received before the alleged wrongful act to those received after, possibly taking into account the replacement cost of the lost benefits. (For example, individual insurance premiums usually are higher than those paid under a group plan.) Experts distinguish between benefits that depend on the recipient’s level of income and those that depend merely on being employed. Those that are triggered only by death or disability are removed from consideration.
Benefits to which both the employer and the employee contribute are closely examined. Because an employee’s contribution is deducted from lost wages, he or she would be doubly compensated if damages were paid for both the contribution and lost wages. Double-dipping also can happen if vacation and sick pay are included in cash earnings, or if fringe benefits such as health insurance are included in lost earnings when the plaintiff is also seeking compensation for specific losses, such as medical bills.
Lost earnings claims often involve contentious issues, such as the effect of variable compensation like commissions, overtime and performance bonuses. The proper loss period and discount rate also may be subject to dispute. Unemployment trends merit consideration, too. For example, how certain is it that the plaintiff would have maintained uninterrupted employment?
The plaintiff’s duty to mitigate the damages can raise additional questions. Defendants might argue that the plaintiff took an unreasonable period of time to find a new job or accepted a position at an unreasonably low pay rate. A vocational or employability expert can prove useful when making mitigation arguments.
The bottom line
Lost earnings claims often require far-reaching, complicated calculations. Attorneys should consult with their financial experts early in the process to ensure critical data is available to develop appropriate arguments.