Single plaintiff cases involving personal injury, death or wrongful employment actions often involve estimating economic damages. Labor economists can provide a rigorous estimate of past and potential future earnings losses to use as the basis for an appropriate award or a fair settlement. Economic theory and empirical research show that several critical factors need to be considered when calculating past and potential future loss estimates.
The concepts of “but for” and “expected value” are the foundation for earnings loss estimates. If these values are calculated reasonably, they provide the most accurate estimates of the potential loss of earnings to the plaintiff. But-for estimates should be based on the expected value of the plaintiff’s earnings and benefits had the alleged improper actions of the defendant not occurred. For example, in a wrongful termination case, the earnings loss is the amount the plaintiff could have reasonably been expected to earn but-for the termination less what the plaintiff can be expected to earn in the actual world (or, if appropriate, what the plaintiff can be expected to earn if he or she had properly mitigated).
Estimates of damages include earnings losses from the date of injury forward. These can be classified as back pay and front pay, which are calculated over different time periods. Back pay is computed up until the time of the expert’s report and front pay from the time of the report until either the time at which the plaintiff is expected to be made whole or the end of the plaintiff’s expected work life. These estimates are combined in a single lump-sum payment that reflects the total net present value of the back pay and the projected lost future earnings stream.
When estimating the past and potential future earnings losses, it is important to consider what is included in the plaintiff’s earnings. Earnings may include not only wages and salary but also other forms of compensation and benefits, such as bonuses, stock options and overtime pay. Estimates of earnings may also include employer-provided fringe benefits. These can include health insurance; contributions to retirement plans; and use of company resources, such as a company car.
Not all fringe benefits should be included in the loss estimates. For example, employer-provided life insurance, which is only a benefit in the event of the plaintiff’s death, is inconsistent with the concept of the plaintiff’s being alive and earning salary or wages in future years, so it need not be included in the loss estimates. As another example, Medicare payments are not directly tied to the worker’s future benefits. Since these payments offer no direct benefit to the plaintiff, they should not be included in loss estimates.
Once the components of earnings and benefits have been determined, it is necessary to estimate their future growth. Earnings typically grow due to inflation and increases in worker productivity. The plaintiff’s previous earnings provide important wage growth information and may be ascertained from W-2 tax data or pay-stubs. Earnings from a number of years should be considered, if possible. Federal government data can also be helpful. If the plaintiff’s occupation and industry closely match the Standard Occupation Codes and North American Industry Classification System codes, then wage and salary changes over time can be inferred from Bureau of Labor Statistics (BLS) data, either nationally, by state or by municipality. When the plaintiff’s occupation does not align with the BLS data, future predictions of the average age-earnings profile of wages and salaries by education and demographic group are available from Census data.
Damages are usually paid as a lump sum that includes the net value of the back pay and the potential future earnings. Determining that lump sum requires using a discount rate to account for, among other things, the fact that money received in the future is less valuable than money received today. Discount rates can be determined based on three factors: the predicted rate of inflation, the risk associated with the future earnings stream, and the implied time value of money. These factors can be captured in current and historical returns on a market basket of securities, such as corporate bonds or common stock, calculated over the timeframe of the projected loss. Some experts argue for using risk-free rates offered by U.S. Treasury bonds rather than a rate on corporate bonds or stocks, which includes a risk premium. There are many reasons a plaintiff may not have continued in his or her current position, either by their choice or due to other unforeseen events. It is proper for the discount rate to include an adjustment to account for those risks.
Finally, it is necessary to calculate the amount of time that the plaintiff’s damages period will cover. If the plaintiff has been terminated, the damages period should be based on a reasonable time necessary to secure suitable alternative employment. If the plaintiff was permanently disabled or died as a result of the event, the damages period is the estimated remaining work life the plaintiff had at the time of the injury. The measure of this work life can be based on case facts if appropriate. It may also be based on U.S. mortality tables, the probability of participation in the labor force, and the probability of unemployment. Forensic economists have worked with these data and developed a process to estimate the likely work life of plaintiffs based on their gender, educational attainment and age. The work life tables, which are regularly updated to adjust to changes in mortality and labor force participation, may provide reasonable estimates of a plaintiff’s work life for the period after the alleged event.
The earnings loss estimates in a single plaintiff case are directly affected by the assumptions regarding the most likely economic outcome for the plaintiff, but for the event that led to the litigation. To the extent that assumptions about that outcome are grounded in defensible economic theory, the resulting expected value estimates of economic loss will be accurate, reliable and defensible.