by Jerry Reiss and Stuart Rosenfeldt
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.
• 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 pays extra compensation for unused sick days, these days can be included in the loss. When the amount provided is seniority-based, the loss should be categorized as back pay damages under seniority-based benefits. Certain reimbursement plans can be tied to accrued service. These can include tuition and medical reimbursement plans. There will be more uncertainty with the latter plans than with the previously described seniority-based benefits because, whether a loss has been sustained by the Title VII termination is dependent upon whether the plaintiff qualifies for the reimbursement in the first place. As a future contingency is involved, the reader would be well advised to treat these losses as front pay damages.
• Other Components of Loss
Other things can figure into economic damages. Perhaps the job that was terminated was 10 minutes from where the plaintiff resided and the replacement job involves two hours of time commuting to the new job. The extra expense and the extra time both translate into future lost income and each should be tabulated as separate damages. If as a result of the job termination and the ensuing lost income the plaintiff was forced to refinance a residence, the present value of the difference in future mortgage payments, determined at the original finance rate, can be an element of damages.3 The amount of this loss should be shown as a back pay damages with a footnote.4 Any points that were paid to the bank to refinance the house also figures into back pay damages.
Back pay damages also includes out-of-pocket expenses that were the direct result of the job termination. These can include legal fees and visits to a psychologist or psychiatrist.5 They include medical expenses, but only to the extent that such expenses would have been paid by employer-subsidized health care benefits, and then only to the extent that the value of the employer-provided portion was not already added to the loss (past or future).
• Offsets to the Past Loss
Offsets against losses include income from all odd jobs.6 Unemployment compensation benefits are not an offset.7 It also includes any Medicaid (or Medicare) benefits and payments, but only as an offset to a portion of the claimed loss of employer-provided subsidized health benefits. Valuing lost income poses many problems (discussed in the valuation section below). It may be appropriate to treat certain aspects of front pay as an offset to loss (rather than a discounted future loss) depending upon the number of years of service during which the plaintiff worked for the defendant. As previously addressed, one of the issues that makes the Title VII loss unique to other injuries is that it is human nature to avoid people involved in unpopular controversy.
The Valuation Process
• Valuing Lost Income
There are three basic ways for the employee to approach finding new work. The first way is to change his or her career so that prior experience becomes less of an issue and then the employee enters at an entry level in the newly chosen profession. This would certainly have a permanent impact on lost wages. The second and third methods pose a “catch-22” dilemma: Either the employee discloses the details with his or her prior employer, knowing full well that it may be seemingly impossible to find work with such candor, or lies on the job application and runs considerable risk that it will be later discovered and serve as the reason for a later discharge. While both adverse employer reactions are also protected under Title VII, realistically speaking, it can be impossible proving why someone was not hired under the second method. Lacking seniority on the new job, it can also be impossible proving the extent to which the firing was retaliatory. There is also a well-established belief that seniority plays a major role in determining who is fired and who is kept in periods of economic slowdown. For all of these reasons, full recovery may not have occurred upon finding new work comparable to that lost. A theoretically extensive probationary period exists once employment is found. Therefore, even after comparable work is found, the value of the future wages may be discounted to reflect the probability that the employee does not survive the theoretical probationary period with the new employer. How much discount should accorded the future income depends upon the extent of skills that the plaintiff offers the job market and how much those skills are in demand.
It is probably a good idea to define an appropriate probationary period based upon the level of skills that the plaintiff possesses and the number of years of service that that person accrued with the defendant. It may also be a good idea to value the discounted loss based upon this contingency (instead of calculating it implicitly as an offset to the future income of the replacement job, as discussed in the previous paragraph). The court might be inclined to ignore the discount once work is obtained. Yet when calculated as an individual contingency, and termed as a loss to one’s professional reputation, the court might be more inclined to accept it (or a portion of it) as a loss.8 After all, isn’t that the precise damage that the plaintiff suffers when the plaintiff will have difficulty securing (or maintaining) new work as a result of the Title VII termination? By categorizing the loss in this fashion, some of the concern that there is speculation is removed.
• Valuing Lost Future Benefits with Proper Actuarial Assumptions
After tabulating the total loss of future benefits, the seniority-based portion of the future benefits must be deducted from the full loss because it will be shown as back pay damages with a footnote. Future nonseniority-based benefits can be very substantial because employees who find comparable paying work often do so at the expense of future benefits (which they enjoyed at the terminated job). Employers are generally sensitive to the cost of benefits for new employees over age 50.9 These costs are much higher on the traditional pension and health benefits.10 These benefits should be tabulated and the loss should be carefully explained because there is less speculation involved in the calculation of this future loss.
Most economic experts choose to value losses with assumptions under what is popularly termed the Alaskan Method. Under this method, the rate of discount is the same rate used to project increases in wages. The net effect, the two cancel each other and the calculation is made simple and easy to explain to the jury. Lost earnings are determined on the basis of the number of future years and nothing else. While the method has obvious appeal because of its simplicity, the fact of the matter is that the plaintiff suffers a great disservice when this method is applied to the Title VII loss. This is true because the method can easily be shown to overstate the future damages, which already faces the historical charges that its calculation is mere speculation. Accordingly, use of the Alaskan method strengthens defense counsel attacks on the extent of loss. Yet part of the future loss consists of components which are much less susceptible to error and these portions will be greatly undervalued (or obscured) by the Alaskan Method. They include lost subsidies on health care benefits and the previously explained seniority-based benefits.
Health care costs are rising much faster than inflation and much faster than any appropriate discount that might apply for the loss of earnings on investments.11 As previously discussed, there is far more certainty associated with these kinds of losses because these benefits are very expensive for persons over age 50, making it much more difficult for such employees to secure comparable work with companies paying these benefits. It is also true of companies with traditional retirement plans. But more importantly, the seniority-based benefit’s portion of the traditional retirement benefits can triple in value, as was previously shown. While the Alaskan method likely overstates the value of the future benefit accruals, it does so at the expense of obscuring the seniority-based benefits because of the method’s inability to distinguish the seniority-based portion of the benefits, which is a near certain loss, from other future benefit losses. These losses are subject to great error and charges of speculation. In order to show this, a comparison of valuation results will be made of both methods under the following example:
The plaintiff averaged 4.667 percent in salary increases over 16 years of employment. He worked for a company that provided him a defined monthly pension equal to two percent of average salary (defined in the plan as averaged over a five-year consecutive period). At the time that he was terminated from his job, that average salary was $4,167/month ($50,000/year). He attained aged 41 when he was fired from the job. Normal retirement (without reduction in benefit) is defined by his plan as age 65. He had 24 future years of service left.
The benefit is first valued explicitly in order to separate out the seniority-based portion. Salaries are projected out using the historical 4.667 percent annual rate of increase. An annual discount rate of six percent will be used to reflect the time value of money. Under explicit assumptions, the average salary of $50,000 triples by age 65. He accrued $1,667/month of benefit when he was fired: .02 X 16 X $4,167. Yet, the $1,667/month accrual would have increased to $4,000 per month at age 65 if he had not been fired: .02 X 16 X $12,500. The total future retirement benefit would have been $10,000 per month had he not been fired. This means that $6,000 per month would have been added after the date of firing: $10,000 - $4,000. The trial occurs 18 months after he was fired. The standard back pay portion of loss is $125/month: .02 X 1.5 X $4,167. Yet seniority-based benefits add $2,333/month to the back pay portion of loss: $4,000 - $1,667. The total back pay loss under explicit assumptions is $2,458/mo.: $125/mo. + $2,333/mo. The total front pay loss is $5,875/mo.: $6,000 - $125/mo.
Back pay and front pay damages attributable to these lost benefits utilize standard mortality pension tables. Using the six percent rate of discount produces the following valuation results:
Back Pay $76,190
Front Pay $182,106
Total Pay $258,296
Under the Alaskan Method, the back pay portion is restricted to $125/month, and the front pay portion is restricted to $2,208. But, as the smaller values apply no discount, the total result is higher as shown below:
Back Pay $14,375
Front Pay $253,920
Total Pay $268,285
The Alaskan Method produced an improved loss in total pay of about $10,000, at the expense of an approximate $62,000 lower value in near-certain loss. This can have a serious impact on what the plaintiff receives as an award. Accordingly, the Alaskan Method works against the plaintiff’s interests because a loss from future service accruals is much less certain than a loss of future seniority-based benefits, and the total future loss can easily obscure this relationship when the method is applied.
Accurately predicting front pay loss requires that there be a body of data from which to develop a reliable set of assumptions. Such data does not exist for Title VII work and it is unlikely that it will ever exist. Even when there is a body of data for certain calculations of front loss, ability to accurately predict this loss is reserved for the large group of victims, where any one calculation can be off the predicted amount by a huge percentage. Yet as a group calculation, valid assumptions produce as many calculated values which are under the emerging experience as those which exceed it. As a result, the calculations are very accurate for the group as a whole even though they can be very inaccurate as to one individual.
Other courts appear to have less trouble with this concept than the Title VII court. It appears likely that case law has created this problem when it permitted the courts to divide responsibility of back and front pay between the court and the jury. An inaccurate forecast of front pay may result in an (effective) award of special damages, which is a jury function, and which is controlled by statute. But given that the needed body of data does not exist to forecast front pay, because of the difficulty of tracing the history of individuals suffering discrimination, it is incumbent on the valuator to assist the court to differentiate the more speculative components of front pay from those that have little or no speculation associated with them.12
It has been shown that the loss of seniority-based benefits is near-certain with a Title VII unlawful termination. The only exception to that certainty is when the court orders reinstatement of the employee’s job position with the defendant. The only other potential issue as to certainty of such loss is the question of whether an employee would have voluntarily left his or her employment even if unlawful discrimination had not occurred. When the amount of seniority-based benefits are considerable, these benefits work as a “golden handcuff” and, accordingly, a very small percentage of employees will terminate their employment when they stand to lose them. Therefore, the calculation of seniority-based benefits has virtually no speculation associated with it. For this reason, loss of these benefits retain far more characteristics of back pay than front pay. The seniority-based benefits portion of the employee benefits should be shown separately and its value calculated and shown in the report under the heading, “Seniority-based Benefits.”
It will be very difficult for many employees to replace income and welfare benefits with like income and welfare benefits when the terminated job subsidized costly welfare benefits for someone advanced in age. While not a near-certain loss, like the seniority-based benefits, these are nonetheless similar to seniority-based benefits to the extent that the older employees were hired when they were much younger and when the cost for providing these benefits was a fraction of what it costs today. Accordingly, there is a much greater likelihood that these benefits will be permanently lost than the outgoing future pay will not be replaced by a new job. For this reason, front pay associated with the loss of these benefits needs to be identified and calculated separately and shown in the report as a separate component with a footnote explaining why the calculation is less subject to speculation than front W-2 pay.
The major issue connected with the loss of future pay is the plaintiff’s ability to find new work after a Title VII controversial firing. To relieve court concerns of the speculation issue that appear to burden them, it would be a good idea to define a credible formula for determining loss to one’s reputation and separate out that portion of the predicted future loss to account for this contingency. This is not an impossible task. For example, reliable data exists that shows the amount of time that can be expected to replace certain jobs (absent unlawful discrimination). It may be typical for a person making over $100,000 per year to spend one year looking for new work. Adopt a conservative multiple to account for Title VII discrimination problems which may be based upon the length of service that the plaintiff provided the employer. By doing this, a major portion of the speculation issue can be reduced and digested for the court’s consideration.
Additional damages can then be the result of suffering psychological harm and possibly medical problems. By separating future loss into as many categories as possible, the court is provided a menu from which to select damages, and if it finds something too speculative, the less speculative portion of the category need not suffer the same fate.
1 The $110,000 loss was obtained by the preceding examples of seniority-based vacation time permanently lost and seniority-based traditional defined benefit accruals lost, both determined by what had been accrued on the date of termination.
2 The Wall Street Journal staff, Lifetime Guide To Money (2d ed. 1997) 188-190.
3 A probability of recovery must accompany the interest discount. Defense attorneys tend to exaggerate its importance because, a future recovery means that the plaintiff is able to refinance the house a third time at the original rate of mortgage, and the cost of future points may offset much of what will be saved. Furthermore, as this could occur five or ten years in the future, the extra interest that is paid as a result of the second mortgage has already been paid at that point.
4 This particular loss qualifies as a past loss even though the extent of it is determined by whether the property can be refinanced a second time in the future. This conclusion follows from the fact that the heaviest impact is felt in the early years, and ability to refinance the house in five or 10 years has a minimal impact on the amount of lessened damage suffered by the first refinancing.
5 Polaroid v. ELI. du Pot, 532 U.S. 843 (2001).
6 But only to the extent that the total amount of hours worked in a day does not exceed the number of hours worked in the job that was terminated.
7 Raisins v. Michigan Dept. of Health, 714 F.2d 614 (6th Cir. 1983; Iamau v. Champion Carriers, Inc., 470 F.2d 744 (10th Cir. 1972).
8 Williams v. Pharmacia, 137 F.3d 944 (7th Cir. 1998).
9 Ultimate claim costs increase by more than 50 percent from age 40 to age 50, and by more than 100 percent by age 55. See Bartleson, E.L., Health Insurance Provided Through Individual Policies (2d ed., 1968) 199. The cost to provide a unit of pension benefit increased by almost 400 percent when the comparison was made between ages 40 and 50, and it increased by 800 percent by age 55. See Winklevoss, H.E., Pension Mathematics (1977) 114.
11 Sohn, W.J., Torrie, W., and Yamato, D.H., Valuation of Retiree Medical Plans, Annual Enrolled Actuaries Meeting, Transcript (1991), Washington, D.C., pp. 251–278; also see Coburn, W.E., and Pal, M., Managing Health Care Costs, and Winterbauer, E.J., Introduction To Welfare Plan Pricing, Annual Enrolled Actuaries Meeting, Transcript (1992), Washington, D.C., pp. 251–278 and 1873.
12 Speculation of front pay damages was cited as one of the reasons for denying front pay damages in Castle v. Sangamo Western, 650 F. Supp. 2d 252 (M.D. Fla. 1986). The appellate court specifically criticized this thinking and reversed the result that followed. See Castle v. Sangamo Western, 837 F.2d 1550 (11th Cir. 1988).
Licensed by the DOL (and IRS) to do valuation work under ERISA, Jerry Reiss is also certified as an associate of the Society of Actuaries. He has written over a dozen article on valuation topics, nine of which were published in state bar journals. He provides expert testimony and support services. His principal office is in Ft. Lauderdale.
Stuart A. Rosenfeldt is a shareholder in Rothstein, Rosenfeldt & Pancier, P.A. He is a board-certified labor and employment lawyer and currently serves as chair of the Labor and Employment Law Section. Mr. Rosenfeldt graduated from Villanova University with a B.S. in economics in 1977 and from the Dickinson School of Law in 1980. He previously served as chair of the section’s certification committee and its continuing legal education committee. Mr. Rosenfeldt practices in Ft. Lauderdale.
This column is submitted on behalf of the Labor and Employment Law Section, F. Damon Kitchen, editor.