How to calculate damages from lost personal income

Experts have to project how an individual’s career path would have progressed, but for an alleged bad act

Recent Supreme Court decisions have made it more difficult for plaintiffs to pursue class certification in employment cases. As a result, there is a new focus on estimating damages for individual claims.

Claims for damages from lost personal income arise from an alleged bad act such as personal injury, gender discrimination or wrongful termination. Conceptually, damages are the difference between the income a person would have received but for the alleged bad act (the “but-for” world) and the income the person actually received given that the alleged bad act occurred (the actual world), where the actual world reflects any mitigating factors. This difference is then adjusted for the time value of money. Damages include lost fringe benefits as part of lost income and can include other losses such as medical expenses and compensation for pain and suffering.

The first area of the dispute relates to the but-for world. The but-for world must realistically extrapolate how a person’s career path would have progressed if not for alleged bad act. An individual who failed to graduate high school in the actual world is unlikely to go on to graduate college and then attend business school in the but-for world. The current law dictates that damages be calculated based on the fact finder’s determination of the most likely scenario. Often the plaintiff’s expert will argue that a more favorable outcome is most likely, while the defendant’s expert will be more pessimistic about the plaintiff’s ability to succeed.

The second potential area of dispute is the severity and duration of the effects of the bad act on a person’s career path. Personal income cases are unique because the ramifications of an alleged bad act may continue for a person’s lifetime, requiring that the actual world be projected with limited information about the person’s future. This problem can be particularly challenging if the plaintiff is young and has not established a well-defined career path. The plaintiff’s expert may assert that the success of the individual’s career path was forever disrupted because of the alleged bad act. The defendant’s expert, however, may argue that the alleged bad act, although unfortunate, was not unlike other adversities that anyone might reasonably encounter and overcome on the path to success.

Contributing Author

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Victoria Lazear

Victoria A. Lazear is a Vice President of Cornerstone Research and has more than thirty years of experience applying economic theory to issues...

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