Estimating Economic Losses Associated with Wages & Benefits

by Mae Lon Ding, MBA, Certified Compensation Professional

Economic Losses associated with wages and benefits must be calculated in many types of litigation including: product liability, medical liability, divorce, wrongful death, employment discrimination, and wrongful termination. Attorneys often select economists, finance experts, and accountants to testify about economic damages. However, when lost wages and benefits are the issue, employee compensation consultants are often more appropriate. Economic damages encompass a very broad area ranging from loss of good will in a business, to earthquake construction damage, to individual lost wages.

Finding the most qualified expert to calculate damages is not easy since it is difficult, if not impossible, to be a true “expert” in all the possible areas in which economic losses can occur. It may be necessary to hire more than one “expert” in the area of economic damages for complex cases involving a number of different types of economic losses. You may need a vocational expert, a compensation expert, and an accountant or economist. When looking for an expert in the area of lost wages and benefits it is important to find an expert who devotes a major portion of their expert witness practice to this area. Such an expert should be very knowledgeable in the following areas:

1. labor market analysis – employment, compensation, and benefit trends
2. design and administration of pay and benefit programs
3. job search methods
4. economic and financial market analysis – interest and investment rate trends
5. mathematical methods of forecasting

Economists, finance experts, and accountants are usually knowledgeable in financial market analysis and mathematical methods for forecasting, but often come up short in the area of labor market analysis, design and administration of pay/benefit programs, and job search methods. Many employee compensation consultants and vocational rehabilitation consultants may not have sufficient background in financial market analysis and mathematical methods for forecasting. In addition, vocational rehabilitation experts are usually not very knowledgeable about design and administration of pay and benefit programs.

The tasks of the expert(s) in calculating past and projected future losses of a plaintiff’s wages and benefits are varied and complex. They may include determinations of the following:

1. Likelihood that the plaintiff will find equivalent employment
2. The availability of jobs similar to that previously held by the plaintiff
3. Qualifications and physical ability of the plaintiff to work
4. Evaluation of the quality of the plaintiff’s job search effort
5. The degree to which past and future earnings capacity might be affected by pay and benefits program design, labor market trends, the employer’s financial success, industry trends, and by the general economy.
6. The appropriate discounting of projected future wage increases for inflation
7. The appropriate discounting of the future losses for the investment earnings that can be expected from a lump sum payment versus a stream of payments over time.
8. The probable future retirement age of the plaintiff and the probable age of the plaintiff at death

When searching for an expert in lost wages and benefits check CV’s or resumes carefully for significant prior litigation experience in lost wages and benefits; personal research and publication in employment, compensation, and benefit trends; and university or professional course-work in economics, finance, statistics, human resources management, compensation and benefits design. Background in design and administration of pay and benefits is particularly important when incentive/bonus pay plans make up a significant portion of the compensation package (as is typical for sales people and executives) or when lost pension benefits must be calculated. In some cases, it might be advisable to hire an actuary to assist in pension calculations.

If a 52 year old person earning $40,000 per year is wrongfully terminated from his or her job in an industry and occupation where the likelihood of future comparable employment is small, the present value of the total earnings loss through the predicted normal life span of the individual could be between $500,000 and $1,000,000 depending on the employer’s benefits and pension plan design and the individual’s past employment history. Due to differences in methodology, assumptions, and data sources used by opposing “experts” on a case, differences in calculation of lost wages and benefits for a single plaintiff (i.e. one person) can result which were more than $100,000 apart. The attorney should expect the expert to effectively defend his/her choice of methodology and data and to assist the attorney in critiquing the work of the opponent’s expert. Some attorneys make the mistake of assuming the calculation of lost wages and benefits is simple or standardized in cases where it is actually quite complex. Particularly perilous is the use of assumptions in the expert’s calculations which are dictated by the attorney rather than being based on the research and analysis of the expert. This is most frequently seen when the damages expert is asked to use an assumption about the time required for the plaintiff to find equivalent employment which is dictated by the attorney. The impact the expert can have on the size of damages assessed by the court makes it imperative for the attorney to find the most qualified damage expert or combination of damage experts for the case.