5 steps to calculate lost future earnings
From the November/December 2018 issue of BCC Advisers Litigation & Valuation Report
rom personal injury to wrongful termination, there are many reasons an individual might seek to recover lost earnings. However, this is no simple matter — in fact, the level of analysis can be just as complicated as estimating lost profits for a business.
The calculations require an estimate of the earnings the plaintiff would likely have enjoyed but for the defendant’s wrongful act, along with the plaintiff’s actual expected earnings. The difference between those two amounts is then discounted to present value. While this sounds relatively straightforward, multiple steps are required.
1. Hire a financial expert
Courts are likely to reject lost earnings estimates that are purely speculative. So, first and foremost, an independent, experienced financial expert is needed. He or she will sift through the data and apply objective market data to arrive at a reliable damages amount. The expert’s task is to estimate the individual’s future earnings, based on facts and circumstances.
2. Analyze earnings history
The calculations start with “base” earnings, including salary, benefits, bonuses and commissions. If the plaintiff has worked for the same employer for several years with a consistent pattern of annual increases, determining base earnings is simple. If the earnings history is erratic, however, the expert takes into account the reasons (such as health problems) in arriving at base earnings. The expert also might adjust base earnings for unusual, nonrecurring payments, such as a “signing bonus” or the settlement of a major lawsuit. He or she further considers variable compensation, such as commissions and performance bonuses.
3. Adjust past earnings as needed
Past earnings trends can be a good predictor of future earnings, but they may need to be adjusted. In analyzing historical earnings trends and projecting future earnings, an expert considers the impact of seasonal variations and economic trends that may distort past earnings patterns.
The expert also analyzes the plaintiff’s promotion history and evaluates the likelihood that promotions will continue at the same rate in the future. The plaintiff’s level of education and future job potential should also be considered.
If the case involves employment discrimination, the plaintiff’s earnings history may not be a reliable indicator of his or her earnings potential. Under those circumstances, it may be necessary to rely on the earnings of other employees in comparable positions.
4. Evaluate benefits
Placing a monetary value on benefits is another challenge. Benefits can cover a lot of ground, from health insurance and retirement plans to company cars and meals. So, they can be a significant component of earnings. The plaintiff may not remember — or even be aware of — all of the benefits he or she receives, so it’s important to use the discovery process to make sure all benefits are accounted for.
In some cases, using statistical evidence, such as average employee benefits as a percentage of salary, may be appropriate. But if benefits are substantial, it may be worthwhile to determine the value of each benefit separately. Other evidence that’s commonly used includes worklife tables and historical and projected inflation rates.
5. Determine the loss period
The appropriate loss period can have a significant impact on the overall damages award. Typically, it extends from the date the plaintiff was discharged or otherwise prevented from working until he or she secures comparable employment. If the plaintiff can’t work or is no longer able to achieve the previous level of earnings, the loss period may extend over his or her entire worklife expectancy.
Experts who apply a systematic approach to calculating lost future earnings can provide the court with objective, reliable information to use when awarding damages. Contact BCC Advisers for more information.