TBA Law Blog


Posted by: Charles Baum II on Jun 1, 2015

Journal Issue Date: Jun 2015

Journal Name: June 2015 - Vol. 51, No. 6

New Tennessee legislation passed in 2014 caps damages under the Tennessee Human Rights Act (THRA), the Tennessee Public Protection Act (TPPA), and the Tennessee Disability Act (TDA) in employment termination (ET) cases for “future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other non-pecuniary damages” at between $25,000 and $300,000, depending on firm size.[1] However, damages for back pay and front pay are not capped in these matters. Since economic losses from lost earnings are not capped, they have become relatively more important in these ET cases.

In ET cases, “lost earnings” is the difference in the amounts a worker actually earned and would have earned in the labor market absent an employment termination. Often, lawyers will hire a forensic economist (an economist serving as an expert in a legal matter) to calculate this amount.[2] To do so, the economist will likely address several key issues, including (i) earnings capacity, (ii) the value of employment benefits, (iii) earnings growth rates, and (iv) mitigating factors.[3] In this article, I review the guidance provided by Tennessee courts in ET cases to be used by economists for these elements when calculating lost back and front pay.

Earnings Capacity

Most forensic economists intend to measure lost earnings capacity when calculating economic losses from lost earnings. They do this by comparing an individual’s earnings capacity before an event, such as an employment termination, with that individual’s earnings capacity after the event.[4] Earnings capacity is often defined as the ability an individual possesses to earn income from employment when working to their capability[5] — what an individual is “able to earn.”[6] Theoretically, earnings capacity is not affected by voluntary decisions to stay home (and not work) or to work a job paying less than what an individual is able to earn.[7]

Economists believe a good measure of one’s earnings capacity is actual earnings, often reported on W-2 forms or in income tax returns. When a record of past earnings either is not available or is not a reflection of earnings capacity, forensic economists may use occupation-specific average or median annual earnings provided by the Bureau of Labor Statistics (in their Occupational Employment Statistics) for each state and locality (i.e., metropolitan and nonmetropolitan areas).

Tennessee courts allow recovery for the pecuniary value of lost earnings,[8] as part of the process of making the injured party whole.[9] In Frye v. Memphis State University, the court explains that the appropriate measure of lost earnings is the difference in what the employee “would have earned had the employer not dismissed him, less what would have been earned, or might have been earned, in some other employment, by the exercise of reasonable diligence.”[10] Plaintiffs can recover back pay — defined as losses from the termination to the trial — and front pay — which are losses incurred after the trial — when reinstatement is not possible.[11] The courts, in Coffey v. Fayette Tubular Product, Suggs v. ServiceMaster Educ. Food Management and Sasser v. Averitt Exp. Inc., provide factors to consider when awarding damages for lost future earnings, which include “(1) the employee’s future in his or her old job [meaning an estimation of what the employee could have earned in the old job if the discharge had not taken place]; (2) the employee’s work and life expectancy; (3) the employee’s obligation to mitigate his or her damages; (4) the availability of comparable employment opportunities and the time reasonably required to find another job.”[12] If the terminated worker is able to obtain alternative employment earning more than from the original employer, then there are no damages from lost earnings.[13] Front pay damages have not been allowed when the terminated worker could not reasonably have remained with the terminating employer.[14]

Employment Benefits

Many workers prefer to receive a portion of their compensation in the form of employment benefits to receive group rates and discounts and to avoid taxes. Since employment benefits have value and may be at least partially interchangeable with wages, forensic economists typically include them as part of economic losses in ET cases. An economist may value a worker’s employment benefits at the amount actually paid by the employer or at the cost of replacing the lost benefits for the terminated worker. If information on employment benefits is not available but information on earnings is, then the forensic economist may impute the value of lost employment benefits using the national average ratio of earnings to employment benefits. This information is provided by the Bureau of Labor Statistics in their quarterly news release, “Employer Costs for Employee Compensation,” for all civilian workers, private-industry workers, state and local government workers, and workers by occupation.[15] Replacement costs for benefits, such as health insurance, could be obtained from quotes, but replacement costs often vary substantially from the employer’s cost of providing those benefits.

Health, vision, dental and disability insurance benefits and retirement benefits are large components of employment benefits for many workers. To avoid double-counting, many economists do not include unemployment compensation contributions made by the employer if the terminated worker later received unemployment compensation payments.[16] Paid time off from work for vacation and sick leave should not be included as part of employment benefits if they are already included as earnings, reflected on W-2 forms or income tax returns.[17] Government-mandated benefits include the employer-paid portion of the payroll tax. This is 1.45 percent of earnings for Medicare’s Hospital Insurance program and 6.2 percent of earnings up to the Social Security maximum taxable wage base, which is $117,000 in 2014, for Social Security’s Old-Age, Survivors and Disability Insurance program. Other legally required employment benefits are federal and state unemployment insurance and workers’ compensation. Employer contributions for these vary because they are partly based on experience ratings.

In Tennessee, lost employment benefits in ET cases are recoverable.[18] Tennessee statutes do not provide separate instructions for calculating the value of lost employment benefits from those for wage and salary earnings. However, if a terminated worker lost an employer-provided benefit, such as health insurance coverage, but did not replace that benefit after the termination and incurred no monetary loss for not having that benefit, then the injured party may not be eligible to receive compensation for that benefit.[19]

Growth Rates

Economic theory predicts earnings grow over time because of inflation — as prices increase, wages typically do as well to maintain purchasing power — and because of productivity increases.[20] Workers become more productive over time as new technologies are developed. Individual workers become more productive over their lifecycle as they gain work experience and develop work-related skills, although these increases may slow or cease at older ages.[21]

Forensic economists may project future earnings growth in ET cases using an individual’s past rates of earnings increases, when a sufficient history of an individual’s past earnings is available. Alternatively, economists may base future earnings increases on historical growth rates for all or part of the labor force. This information is provided by the Bureau of Labor Statistics in its monthly report, Employment and Earnings, and in their quarterly publication, Employment Cost Index.[22] Forecasted earnings growth rates are provided by economists for the Social Security Advisory Board, the Congressional Budget Office and the Economic Report of the President.[23]

Employment benefits may increase with earnings for the reasons outlined above but not necessarily at the same rate.[24] Certainly the employer’s Social Security benefit contributions increase proportionally with earnings. However, an economist may show the value of some employment benefits, such as health insurance coverage, to be independent of a worker’s earnings and therefore to grow at a different rate.

To make the injured party whole in ET cases, Tennessee courts allow awards of back and front pay to grow over time with anticipated pay raises.[25] For example, in Jackson v. City of Cookeville, the appeals court concludes that a former employee’s lost future earnings would have increased over time, particularly given evidence of pay increases that he had been awarded in the past. However, earnings growth is included in awards at the court’s discretion and is not to be included when increases are purely speculative.[26] In Barnes v. Goodyear Tire and Rubber Co., the court reduced a jury’s award of back pay for a terminated employee by the amount of projected pay growth because the raises were deemed to be too speculative.[27]

Mitigating Factors

Forensic economists typically assume that those harmed take reasonable actions to limit damage and offset losses with mitigating factors. In ET cases, obtaining another job with earnings and employment benefits after a termination is a primary way of limiting damage.[28] Unemployment compensation in ET cases is another source of income that some economists may deduct from damages.

In general, Tennessee requires mitigating factors to be deducted from economic losses due to the Doctrine of Avoidability (e.g., the Duty to Mitigate Damages), and mitigation is a factor to be considered when awarding front pay.[29] Tennessee standards provided in Frye v. Memphis State Univ. stipulate that when an employee has been terminated, “there is a duty to minimize this loss by seeking other employment.”[30] The terminated employee is “required to exercise reasonable diligence in seeking other employment of a similar or comparable nature” but “[t]he employee is not required to mitigate damages by accepting a position that is not comparable or is, in effect, a demotion.”[31] The job search need not even be successful, but if the employee refuses an equivalent alternative job, then the right to corresponding damages is forfeited. It is the defendant’s responsibility to prove substantively equivalent jobs are available and that the terminated worker has not exercised reasonable diligence finding one.[32]

Collateral benefits such as unemployment compensation should not typically be deducted from damages in Tennessee ET cases — collateral benefits should not be shifted such that they become a windfall for the wrongdoer — but the court ultimately retains discretion over this.[33] Just the opposite, a payment from a fund financed by the defendant would be credited against the liability of the tortfeasor.[34]

Conclusions

Economic losses are becoming increasingly important in ET cases because they are not capped. This paper summarizes common approaches used by economists to quantify lost front and back pay and benefits. In some instances, Tennessee legal procedures give the economist flexibility to make assumptions they deem reasonable, but lawyers and forensic economists should follow the guidance provided by Tennessee courts, outlined above, carefully to know which of these methods are admissible. Ultimately, the economist is to assist the court by providing estimates that are to as reasonable a degree of economic certainty, as the case permits.

Notes

  1. See Public Chapter 995 (2014) and Tenn. Code Ann. §4-21-313.
  2. Forensic economists may also be asked to calculate lost earnings in personal injury (PI) and wrongful death (WD) cases.
  3. Other factors forensic economists must incorporate in ET cases are worklife expectancy, which is used when calculating lost front pay to estimate the number of years an individual would have remained in the labor force and been employed, and the discount rate, which is used to discount future losses to their present value to identify the lump-sum payment — paid in the present — that will grow when invested to the amount lost earnings and benefits would have been in the future.
  4. Brookshire, Michael L., and Stan V. Smith. (1990). Economic/Hedonic Damages: The Practice Book for Plaintiff and Defense Attorneys. Chicago, IL: Smith Economics Group LTD. Martin, Gerald D. (2010). Determining Economic Damages. Costa Mesa, CA: James Publishing Corporation.
  5. Shahnasarian, Michael. (2011). Assessment of Earnings Capacity. Tucson, AZ: Lawyers & Judges Publishing Company Inc. (Third Edition).
  6. Horner, Stephen M., and Frank Slesnick. (1999). “The Valuation of Earning Capacity Definition, Measurement and Evidence.” Journal of Forensic Economics, 12 (1): 13-32.
  7. Corcione, Frank P., and Robert J. Thornton. (1991). “Female Work Experience: Voluntary Versus Involuntary Labor Force Activity.” Journal of Forensic Economics, 4 (2): 163-174.
  8. Frye v. Memphis State University, 806 S.W.2d 170 (Tenn.1991).
  9. Barnes v. Goodyear Tire and Rubber Co., 2001 WL 568033 (Tenn.Ct.App.2001); Hawley v. Dresser Industries Inc., 958 F2d 720, 725 (6th Cir.1992).
  10. Frye, 806 S.W.2d at 173.
  11. Coffey v. Fayette Tubular Product, 929 S.W.2d 326, 332 (Tenn.1996); Suggs v. ServiceMaster Educ. Food Management, 72 F.3d 1228, 1234 (6th Cir.1996); Sasser v. Averitt Exp. Inc., 839 S.W.2d 422, 433 (Tenn.Ct.App.1992).
  12. Coffey, 929 S.W.2d at 332; Suggs, 72 F.3d at 1234; Sasser, 839 S.W.2d at 433.
  13. Denney v. Lovett, 2006 WL 1915303 at *10 (Tenn.Ct.App.2006). Maness v. Collins, 2010 WL 4629614 at *11 (Tenn.Ct.App.2010).
  14. For examples, see Ayala v. Summit Constructors Inc., 788 F.Supp.2d 703, 724 (M.D.Tenn.2011) and Bohannon v. Baptist Memorial Hospital-Tipton, 2010 WL 1856548 at *7 (W.D.Tenn.2010).
  15. Bureau of Labor Statistics. (2014). “News Release.” U.S. Department of Labor, Employer Costs for Employee Compensation - June 2014. Washington, D.C.: U.S. Bureau of Labor Statistics.
  16. Frasca, Ralph R. (1992). “The Inclusion of Fringe Benefits in Estimates of Earnings Loss: A Comparative Analysis.” Journal of Forensic Economics, 5 (2): 172-136.
  17. Launey, George V. (1990). “On Valuing Lost Fringe Benefits in Death Cases.” Journal of Forensic Economics, 3 (2): 86-86.
  18. For example, see Jordan v. A.C. Enterprises Inc., 2012 WL 6562032, *4 (Tenn.Ct.App.2012).
  19. Plunk v. Gibson Guitar Corp., 2013 WL 2420539 at *10 (Tenn.Ct.App.2013).
  20. Becker, Gary. (1975). Human Capital. New York, NY: National Bureau of Economic Research.
    Ben-Porath, Yoram. (1967). “The Production of Human Capital and the Life Cycle of Earnings.” Journal of Political Economy, 75 (4): 352-365.
    Gilbert, Roy F. (1997). “Long-Term and Short-Term Changes in Earnings Profiles.” Journal of Forensic Economics, 10 (1): 29-49.
  21. Gohmann, Stephan F., Myra J. McCrickard, and Frank Slesnick. (1998). “Age-Earnings Profiles Estimates: Do They Change Over Time?” Journal of Forensic Economics, 11 (3): 173-188).
  22. Bureau of Labor Statistics. (2014). “Employment & Earnings Online.” Washington, D.C.: U.S. Department of Labor: http://www.bls.gov/opub/ee/.
    Bureau of Labor Statistics. (2014). “Employment Cost Index.” Washington, D.C.: U.S. Department of Labor: http://www.bls.gov/news.release/eci.toc.htm.
  23. Social Security Trustees Report. (2014). “2014 OASDI Trustees Report.” Washington, D.C.: Social Security Administration, 2014 OASDI Trustees Report, Economic Assumptions and Methods, Tables V.B1 and V.B2.
  24. Clauretie, Terrence M. (2002). “Fringe Benefits, Employer-Paid Health Insurance and the Age-Earnings Cycle: Implications for Forensic Economists.” Journal of Legal Economics, 63: (3): 63-79.
  25. Jackson v. City of Cookeville, 31 F.3d 1354, 1360-1361 (6th Cir.1994).
  26. Sasser, 839 S.W.2d at 434.
  27. Barnes, 2001 WL 568033 at *4.
  28. Bowles, Tyler J. (1994). “Wrongful Discharge: the Time Horizon of Future Damages and the Economic Basis for Damages.” Journal of Legal Economics, 4 (1): 75-82.
    Franz, Wolfgang W.  (1990).  “Wrongful Employment Termination and Resulting Economic Losses.”  Journal of Forensic Economics, 3 (2): 31-47.
  29. Coffey, 929 S.W.2d at 332; Sasser, 839 S.W.2d at 434.
  30. Frye, 806 S.W.2d at 173.
  31. Id at 173.
  32. Id at 173; Maness, 2010 WL 4629614 at *10.
  33. Barnes, 2001 WL 568033 at *8; Jackson, 31 F.3d at 1360-1361.
  34. Barnes, 2001 WL 568033 at *9.

Charles L. Baum II CHARLES L. BAUM II, Ph.D., is a professor of economics at Middle Tennessee State University. He served as the chairman of the MTSU Department of Economics and Finance from 2008-2014. He also regularly serves as an economics expert in injury, death, employment, discrimination and business/corporate cases. He has represented plaintiffs and defendants in matters involving economic earnings, corporate profits and business valuations throughout the southeast. He is a member of the National Association of Forensic Economists. He received his Ph.D. in economics from the University of North Carolina-Chapel Hill. Email him at baumeconomics@gmail.com or call at 615-556-9287.