Valuing economic damages in employment litigation from a plaintiff's perspective.

• Author: Reiss, Jerry
• Position: Part 2

Part I of this article [May] showed the valuation issues that drive the analysis of economic damages. It showed why the Title VII valuation is unique. The uniqueness of the Title VII valuation requires that a special valuation report format be adopted to deal with the testimony problems of a Title VII loss. Part I also contains a discussion of the role that employee benefit plans play in the workplace and how some companies concerned about Title VII liabilities have utilized these benefit programs to avoid discrimination controversies.

Part II of this article shows the core valuation issues that must be addressed and the decisions that must be made before a Title VII valuation is undertaken. It identifies the components of loss and how to value them.

Valuation Parameters

* Components of Loss

The components of economic loss include some of the obvious things, such as income and benefits. Benefits include retirement and welfare benefits. Welfare benefits include employer-provided health benefits, vacation pay, and Voluntary Employee Benefit Association programs (VEBAs). They do not include long- and short-term disability benefits unless a probability of disability has been used to discount front pay. Otherwise, the valuation result would count these wages twice. If the loss of company-provided subsidized health insurance benefits appear to be less than the actual out-of-pocket expenses for the formerly fully covered health care services, the valuator may choose to use the out-of-pocket expense method instead. Under this method, this component of front pay is determined by projecting out future health care claims based upon available information. This method would be inappropriate unless the plaintiff is suffering from an ongoing illness that can be expected to run long-term.

* Identifying Seniority-Based Benefits

The seniority-based benefits component was defined in Part I of this article as the component of loss that was earned in the future but that becomes unrecoverable with comparable employment and identical benefits. Typically, certain employee benefits fall into this category. Care must be used in valuations of employer-provided benefit losses because they often can account for the largest portion of lost income (both future and past). The plaintiff may find new work, but at a significant loss of benefits that he or she previously enjoyed.

A very substantial and often overlooked element of lost income is vacation pay. The amount to which the plaintiff may be entitled is often determined based upon years of service with that employer. For example, the plaintiff may have been eligible for four weeks' vacation per year based upon 20 years of on-the-job experience that had accrued at the date of termination, yet only entitled to receive one week as a new employee with the new job (with an identical vacation schedule). Since it can take 20 years of additional service before requalifying for four weeks' vacation, this form of compensation has been lost forever. For example, consider someone age 40 who terminated employment and who was previously eligible for four weeks' vacation based upon the following schedule: one week vacation provided for the first 10 years of service; two weeks' vacation time provided for service between 10 and 15 years; three weeks' vacation time provided for service between 15 and 20 years; and four weeks' vacation time provided after 20 years of service. The 40-year-old with 20 years of service lost 45 weeks of vacation time when the job terminated. As much of this vacation time would have been taken at much higher salaries, the lost vacation time can equal or exceed back pay.

Traditional retirement benefits under defined benefit plans can have an even greater impact than vacation time, because the benefits paid at retirement are based upon salaries that are earned near retirement. A person earning $20,000 per year with 20 years of service may have accrued a benefit at age 40 worth $40,000. But as salaries (adjusted for inflation and seniority promotions) can easily triple by retirement age, the loss that the employee sustains by the termination can be $80,000, attributable only to the benefits that have already been accrued: (3 x $40,000)-$40,000.

A $30,000 back pay loss for the loss of wage for 18 months can be dwarfed by the $110,000 damages the employee sustained for the loss of seniority benefits. (1) The value of the immediate loss can therefore be significantly less than the value of this future damage, because seniority-based benefit plans do not accrue uniformly. Instead, these benefits provide the lion's share of value during the last 10 years preceding the normal retirement age (under the plan). (2) It is important that these damages be distinguished from future losses which are often thought of as speculative. As the benefits are lost even if the employee finds comparable work with identical benefits, these damages are properly categorized as past losses with a footnote.

The reader should be cautioned that there are other forms of employee benefits that base the amount of benefits provided on the amount of employer service that was attained. Sick days can fall into this category. Normally, inclusion of sick days results in counting the same lost income twice. But when the employer policy...