Calculating economic damages in an employment case. (wrongful dismissal) (Statistical Data Included)

Disputants in wrongful dismissal cases spend most of their time arguing about and litigating liability issues--whether the defendant employer was guilty of misconduct, breach of contract, or discrimination. Frequently the parties do not consider, study, or carefully evaluate damages issues until it may be too late. This first part in a series of two articles focuses on the nuts-and-bolts damages issues frequently neglected by attorneys and their clients. The author succinctly sets forth court-approved methods of calculating back pay, front pay, and benefits. In the second article, the author will apply these concepts to a hypothetical case, showing how employee and employer representatives and experts with different assumptions arrive at vastly divergent results.

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Calculating a plaintiff's economic damages in an employment case is seemingly quite straightforward. The basic method is to take the total compensation that the plaintiff would have earned absent the employer's allegedly unlawful action and subtract the income that the plaintiff can expect to earn in mitigation. In fact, however, calculating economic damages involves much more than adding up columns of numbers. The same raw data (e.g., the employee's salary at the time of discharge, the anticipated growth rate of the employee's salary, and the length of the ensuing unemployment) can yield drastically different damages figures depending on which assumptions are made. This article discusses the mechanics of an economic loss assessment in an employment case and seeks to bring to light the assumptions lurking beneath such estimates.

Typically, a plaintiff's economic losses have two components: back pay, or past losses; and front pay, or future losses. Back pay refers to lost compensation for the period from the alleged illegal act to the time of trial. Front pay represents a plaintiff's anticipated losses after trial.

Calculating Back Pay and Benefit Losses

Past economic losses consist of all economic remuneration (e.g., base salary, salary increases, bonuses) and fringe benefits that an employee could have expected to receive through the time of judgment but for the allegedly illegal act, as well as the profit from employer stock options that an employee could have exercised during this period. Back-pay awards are mitigated by amounts earned since termination, and prejudgment interest may be awarded.

Lost Base Salary

The starting point in determining the lost salary of a discharged employee is to take his or her base annual compensation at the time of the termination or illegal act, as reflected in a W-2 statement, and multiply that amount by the length of time from discharge to trial (reduced to a multiple of a year or month). Thus, where Plaintiff X was earning $50,000 per year at the time of discharge, and the trial took place three years after the discharge, her lost base annual salary is $150,000 ($50,000 x 3).

Similarly, the lost salary of an employee challenging the unlawful denial of a promotion is the difference between his or her annual salary with and without the promotion multiplied by the length of time between the date of nonpromotion and trial. Where Plaintiff Y, earning $50,000 per year in his job, applies for and is denied a promotion to a job paying $60,000 per year, and then must wait two years to challenge the denial at trial, his lost salary is $20,000 (($60,000 - $50,000) x 2).

A discharged employee's base compensation is not necessarily his or her earnings immediately prior to the termination. When a discriminatory environment has deflated a plaintiff's pre-discharge earnings through discriminatory practices, a court may apply the earnings he or she was receiving before the discrimination. In Durham Life Insurance Co. v. Evans, (1) the Third Circuit held that the district court, in calculating economic damages, properly used as a base salary the plaintiff's higher 1992 earnings of $119,000 rather than her earnings of $66,000 in 1993, the year her employment was terminated. The court noted that in 1993 the plaintiff was subjected to severe harassment that adversely affected her earnings. The court wrote that if the plaintiff's salary on the last day of employment was used to calculate back pay,

 
   it would be to a discriminator's advantage to increase its mistreatment 
   from a hostile environment to a decrease in pay, so that an ultimate 
   penalty would be minimized. [The plaintiff's] attempts to deal with the 
   discrimination without quitting, despite the negative effects on her 
   salary, should not be held against her. (2) 

When a plaintiff brings suit challenging the denial of a promotion to a position for which a salary had not yet been established, his or her attorney will ordinarily look to the salary of the successful candidate as a benchmark for calculating the plaintiff's damages. The salary awarded the successful candidate, the plaintiff will argue, reflects the employer's own measure of what the job is worth, and therefore is a fair basis on which to evaluate damages. (3) Alternatively, an estimate of the plaintiff's lost salary can be based on the salaries of other employees holding positions similar to the one that was denied the plaintiff.

By contrast, defendants often contend that the successful candidate's or replacement's salary is not a fair measure of a plaintiff's economic damages. Defense counsel will try to show that the successful candidate had superior credentials or a more favorable salary history than the plaintiff, and therefore commanded a higher salary. When the successful candidate's earnings

depend on individual efforts, such as with a sales executive paid on commissions, arguably there is even less reason to use his or her compensation as a measure of damages.

When calculating back losses, the plaintiff's counsel should make sure to include all forms of compensation, in addition to base salary, that the plaintiff had been receiving, including commissions, overtime, and tips. (4)

Loss of Potential Promotions and Salary Increases

In addition to lost base salary, a plaintiff's back-pay losses include the salary increases that the plaintiff would have received but for the wrongful discharge or nonpromotion. There are several approaches for estimating damages arising from forfeited salary increases.

First, anticipated salary increases can be projected from the employee's own history of salary increases with that employer. (5) A second method is to look to the actual salary increases given to similarly situated employees subsequent to the plaintiff's discharge. (6) The plaintiff has the burden of showing, however, that the comparators selected are truly similarly situated. (7)

A third …