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.

Quantifying lost income damages for an individual plaintiff involves projecting the plaintiff’s work history as well as his or her retirement income, since damages can potentially continue until the plaintiff’s death. The estimate of income for each year, either but-for or actual, is calculated as a person’s expected income multiplied by the probability that the person will be working for that year. The probability of a person working is the product of:

  • The probability that the person will survive the year,
  • The probability that the person will be in the labor force, and
  • The probability that the person will be employed, given that the person worked in the prior year.

Once the person retires, the expected income is the person’s retirement income multiplied by the probability that the person will survive the year.

Because the projections of both the but-for and actual worlds correspond to the same individual, the two projections generally must be consistent. One cannot reflect the skills of an MBA graduate in one world but the skills of a high school graduate in the other, unless the difference is caused by the alleged bad act. Real differences between the projections do arise, for example, in cases where the individual may have suffered severe personal injuries.

There are three ways damages estimates calculated by the plaintiff’s expert and the defendant’s expert commonly differ.

  1. The individual’s career path absent the alleged bad act,
  2. The severity and duration of the effects of the alleged bad act on the individual’s career path
  3. The extent to which the individual mitigated the effects of the alleged bad act.

A fourth, the inclusion of economic losses other than lost income, such as medical expenses, may be important but is not discussed here.

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.

For example, a person who is wrongfully terminated may take an alternate position and not succeed in the actual world but may be projected to succeed in the but-for world. In this case, the articulation of the actual world must adequately explain this difference. For instance, a person’s termination may be perceived as having sent an adverse signal, and this stigma may severely limit the prospects in the individual’s chosen field. Likewise, economic conditions may have limited alternate job options, or the alleged bad act may have severely hampered the person’s ability to function.

The third likely area of dispute is mitigation. The plaintiff is required to mitigate losses by finding comparable employment. But comparable employment is ill-defined except that mitigation generally does not require the plaintiff to seek work outside his or her chosen profession. Thus, the plaintiff who worked flipping hamburgers at a fast-food restaurant would likely be expected to find a job at another fast-food restaurant even if it paid less. Mitigation is relatively simple at low-wage jobs because such jobs are often viewed as fungible. However, mitigation becomes much more complicated when the plaintiff is highly educated or has incurred considerable expense to become trained for a specific profession.

The most important consideration when calculating damages for lost personal income is the consistency in the scenarios projected for the career path of the individual with and without the alleged bad act. The severity of the alleged bad act, the extent and duration of its impact and the plaintiff’s ability to mitigate the lost income are critical factors in explaining the differences between damages estimated by the plaintiff’s expert and damages estimated by the defendant’s expert.

 

The views expressed in this article are solely those of the author, who is responsible for the content, and do not necessarily represent the views of Cornerstone Research.

Contributing Author

author image

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...

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.