Classification and Valuation of Damages Under Title VII
The starting point for any valuation of liability in an employment case is a review of the particular statutes that defineand limit the available relief. The case law interpreting these statutes is useful, but does not substitute for the statutory language. Title VII may be the most challenging of these statutes. The Civil Rights Act of 19911 ( the CRA) added elements of damages to supplement the equitable relief traditionally available under Title VII. However, the additional categories it created have complicated the valuation process, accounting for some of the confusion and conflicts between experts and the courts on some important issues. This article will discuss some approaches to avoid that confusion.
The authors begin with a definition of front pay and distinguish it from front-end damages because certain front-end damages that exceed front pay qualify under the CRA as “future pecuniary losses”2 subject to the statutory cap. contrast, front pay is not subject to the statutory cap.3 Adding to that, most of the circuits have ruled that front pay awards should not be decided by a jury and should only be granted by the trial judge after first determining that reinstatement is not a feasible option. A jury, however, may determine front-end damages. Next we identify back pay awards and distinguish them from back-end damages. Certain back-end damages will be subject to the cap, whereas back pay awards are not.
As will be shown, the proper characterization of damages is important in order to avoid under-compensating or over-compensating an employee, which may result in lower awards due to caps, but a proper characterization may increase them.
Front Pay Awards
The purpose of front pay is to provide an equitable remedy when it is impractical to order the employee’s reinstatement to his or her previous job.4 While reinstatement is the preferred or default remedy, a hostile work environment that existed before the litigation may make reinstatement impractical.5 Oftentimes, the litigation itself creates an atmosphere of animosity that makes reinstatement unworkable.6 Many employers will not want reinstatement for the fear that the animosity, which was created during litigation, will carry forward into the workplace. Other times, the position has already been filled. While it is not unheard of for courts to order a replacement employee discharged to recreate the vacancy, this relief is not always imposed.
When reinstatement is not a feasible option, the front pay award is only intended to bring the employee to the point where he or she would have been had the unlawful termination not occurred, i.e., to make the employee “whole”7 or to restore the status quo.8
Likewise, if the discrimination under examination is a failure to promote, then front pay awards are measured by the income likely lost as a result of that failure. Use of the word likely is deliberate because the process of valuing lost pay is not an exact science.
Back Pay Awards
Back pay awards include pay and benefits lost as a result of the unlawful discrimination up to the time of trial. If the case involves an unlawful firing, then this loss includes wages and benefits that likely would have been earned had there not been an unlawful termination. These awards must be mitigated by what has been earned, or reasonably could have been earned, during the interim.9 If the defendant is able to demonstrate that satisfactory efforts have not been made to secure new work, the judge or jury may decrease the amount of an award to reflect this mitigation.10 Likewise, if the issue under examination is a failure to promote, then back pay awards are determined by the additional income likely lost as a result of that failure.
Another item to consider is sometimes thought of as a future loss, but is better considered a component of back pay. A valuation should include seniority-based benefits, certain types of retirement and welfare perks that pay benefits in accordance with a formula or schedule that is based on years of service.11 This loss of accumulated service credit produces a future benefit component which is undervalued when reinstatement is not ordered, or retroactive service credit not given. As such, this future benefit, to the extent it relies on service credit lost up to trial, can be shown as back pay.
The reason is that in order for the employee to be made “whole,” a subsequent employer must offer the same value of benefits as well as the same amount of compensation. When the new company’s schedule of compensation and benefits are identical, the employee is made wholewith respect to front pay. However, the amountof future benefits is not identical even when the schedule of benefits is identical, because of lost seniority. These benefits are notlost with reinstatement if retroactive service credit is given because the former employer recognizes service accumulated in the original employment, while the new employer does not.
Economic Damages that Are Neither Back nor Front Pay
When an employee sues his or her employer, that employee is stigmatized in the future and the consequences of filing suit have little to do with whether reinstatement occurs.12 The Seventh Circuit explained the rationale for this loss in Williams v. Pharmacia:
Reinstatement (and therefore front pay) does not and cannot erase that the victim of discrimination has been terminated by an employer, has sued the employer for discrimination, and the subsequent decrease in the employee’s attractiveness to other employers in the future, leading to further loss and time or level of experience. Reinstatement does not revise an employee’s resume or erase all forward-looking aspects of the injury caused by the discriminatory conduct.
The discriminatory event and its consequences narrow the range of opportunities for that individual, a fact that will follow the employee throughout his or her career.13 If the employee becomes involuntarily unemployed due to a plant closing many years after reinstatement occurs, the discrimination could affect the job prospects for the employee even at that time. Likewise, finding comparable work immediately after termination does not guarantee the future availability of comparable work under the economic forces of a global economy, and the injury sustained could revisit that person’s prospects irrespective of whether that employee is made whole with a new job. The damage that the employee sustains will be directly related to the amount of time that he or she spent with the offending employer. This damage, like seniority-based benefits, is not a front pay damage even though it affects the amount of future earnings. The EEOC and Seventh Circuit have labeled this damage as affecting one’s reputation and professional standing and, therefore, a pecuniary loss under the CRA’s compensatory damages category.
Other pecuniary or economic damages available under the CRA include all the out-of-pocket expenses caused by the discrimination. These can include medical bills attributable to suffering caused by the discrimination, as well as job search expenses.
When the replacement job requires extra expenses, these extra costs should be reduced to present value and included in this category. If these costs were substantial in relation to the pay received, it would probably be advisable to limit the duration of the costs to the average number of years that American workers stay at any one job. The basis for limiting this future expense is that the worker has tremendous incentive to either find higher paying work or reduce the expenses associated with earning the money. While the extra expenses of the replacement job neatly fit into this category of “make whole”relief, the extra time spent commuting does not. That extra time can be analogized to an extra job and the plaintiff should argue that the “make whole” policy has not been achieved when it requires more than one job to replace the job that was lost. That particular economic consequence is measured as a shortfall of income included in front pay awards. The decision to measure this shortfall must be tempered with whether it will undermine what the judge will award as front pay because, at the very least, a lengthy commute creates extra incentive for the employee to find new work that involves fewer hours for the same money or to relocate closer to the new job. This enables the defense to argue for a reduction in the number of future years used to measure this loss. With these competing interests, it would probably be a good idea to measure this loss only when the plaintiff enjoyed an exceptional location to the old job which cannot practicably be duplicated with the new one.
The CRAalso provides remedies for nonpecuniary losses such as pain and suffering as well as punitive damages. Neither of these categories have valuation consequences. The only point that merits discussion is that provable economic losses will more likely survive judicial scrutiny at the trial and appellate levels, because nonmonetary damages are inherently subjective and require progressively higher levels of proof as the awards increase.
Finally, some rulings have suggested that the front pay award should be discounted if there is an award of punitive damages. This should no longer be an issue following the Supreme Court ruling in Pollard, where the Court found their purposes mutually exclusive.
Factors Limiting Length of Front Pay
Once the various damage components have been identified, the valuation process must address the assumptions that must be used to quantify the loss. This is where most of the “battle of the experts” is fought, because these assumptions are often attacked as too speculative or too conservative. The valuator must also pay particular attention to appellate decisions regarding how each category of loss should be proven and calculated.
The most important assumption that must be made in valuing cases, and the one most difficult to determine, is the length of time used to calculate front pay awards. The case law suggests several factors must be used to determine this assumption. The “make-whole” policy is designed to return the employee to the status achieved before the discriminatory firing. Even if the trial court ordered reinstatement, the employee was not guaranteed his or her job indefinitely and may have voluntarily left anyway.14 Accordingly, there are two major types of forces that affect the length of potential future employment in a job: 1) the factors that would have likely brought about a voluntary termination, retirement, death or disability; and 2) market or other forces that would have resulted in an involuntary termination.15 The employee faces uncertain employment with that company having nothing to do with the discrimination. The global economy may have phased out the job.16 A future plant closing and a required relocation may not have suited the employee. The fact of the matter is that employees frequently change jobs in this global economy and the front pay award must take into account this likelihood.17
The employee’s stated intentions are a good starting point. They provide initial evidence of how long the employee wants to be employed, and wanted to work for that employer. Education, work history, and age also factor into the possibility of voluntary terminations. If the employee achieved a higher position with the prior employer than his or her education would otherwise predict, that fact alone may be sufficient to justify extending the length of front pay, even to normal retirement age.18 One should also look at the history of the employee.19 If that employee had 20 years of service and this is the only job that the employee had, then that should also support extending this measure out to a normal retirement age. However, if there is a history of job changes, that history should be used as the best predictor of how long that employee would have stayed. If there is little history to work with, then one might be forced to look to averages within the industry as the basis for this measure. The problem with using averages is that some employees change jobs infrequently or not at all, whereas others change jobs frequently. Averages also reflect unlawful terminations, which, for the most part, may even go unchallenged.
The case law also addresses extending the loss out to retirement when the injured employee is within five to eight years of that date.20 This makes perfect sense even when the job history tells a different story because employees nearing retirement show more stable patterns of employment than much younger employees.
The size of the company and its past performance can affect whether the front pay period, as determined based on employee factors, needs to be cut back. The contemporaneous economic environment must be assessed, paying particular attention to the health of the industry that provides the job. The changing face of retirement planning is also an important factor because in the 1990s many employers shifted the primary responsibility for retirement savings from employer-provided contributions to employee-provided contributions. Accordingly, an employee’s decision of when to retire may be shaped not only by the employee’s accumulated savings and investments, but the employer’s decision to eliminate mainstream retirement plans.
The worker’s probationary status is an element that could affect his or her length of employment. However, the mere fact that the person is on probation should not be used to limit the front pay period to the end of probation, because of the possibility that the employee could have cleared probation in a nondiscriminatory work place. Further, adopting as an assumption the end of the probationary period as establishing the likely length of the job is self-contradictory, because it argues that few employees, if any, work past that date. The worker’s probationary status should be viewed as a two-sided sword. Both the employer and the worker are equally likely to be unhappy with each other during this period. Employers could be expected to use this as a defense to discrimination, and they often do. To allow the employer to use this same issue to discount the award amounts to a double-discount. Similarly, the employee can always be expected to argue that he or she had intended to remain employed until retirement. Therefore, one can successfully introduce an appropriate amount of discount by using the actual work history of the employee, which already factors in this likelihood, and one need address the discount explicitly only when there is little or no work history.
The final consideration is whether the subject’s employment required an employment contract to be renewed, and if so, the likelihood that it would have been renewed. There should only be only one factor that affects this parameter: What has generally happened with other such employees with contract renewal issues? Employers who would argue that the likelihood of renewal should be discounted because it wasn’t happy with the services of the employee will inevitably use its dissatisfaction as a defense to the firing. Allowing its use to then reduce the award also serves as a double-discount to the amount of damages. The validity of the defense will be determined by whether a jury finds unlawful discrimination, and if it does not, then there are no damages to consider.
• Probability of Survival
As the willingness to work is controlled by how long the employee lives, this factor too must be considered in front pay award.21 One may also argue that if a front pay award is discounted for the probability of survival, then back pay awards should similarly credit the losses with survival credit. This point has been overlooked by courts.
• Health Status of Employee
While the employee’s health status directly affects how long the employee could have worked,22 its use is contraindicated as a discount when the employee was generally healthy at the time of discharge, and that health worsened following the discharge. In fact, when the cause and effect of the worsened health can be established, such as a disability resulting from the discharge, the disability may be reason to extend the number of years of front pay loss, not to discount it.23
• Discount Rate
Without question, the selected discount rate can have a great impact on front pay awards. One court found that the discount rate that should be used should be one that requires little or no risk on the part of the employee.24 The ruling fails to describe how this should be determined because what is considered little or no risk varies greatly with the measurement period under consideration. Therefore, the authors recommend that the amount of discount is directly related to the length of the front pay calculation. It may be appropriate to use a low interest rate for short front pay periods, such as a few years. But this may be entirely inappropriate when the facts justify a much longer front pay period. For this measure, we recommend that an interest rate close to the ERISA “GATT” rate (at the date of valuation) be used, which is a four-year moving average of 30 year Treasury securities.25 This is a published rate and is available on a monthly basis.
Anything worth building requires that a proper foundation be laid before the structure is built. The foundation for determining the economic value of a Title VII discrimination claim are the categories created by the 1991 CRA. Each component of liability must first be defined and fit into these categories before any are valued. This prevents double counting the same liability at the same time that it ensures that no piece of the liability is overlooked.
The case law has also enumerated the factors that must be addressed for measuring this liability. The valuation report should address each one (to the extent that the information is readily available). This will help the jury and the judge better understand the issues that determine the award. It will also assist both parties to the litigation in settling the dispute between them without the need of trying the matter.
1 See 42 U.S.C. §1981a.
2 42 U.S.C. §1981a(b)(3).
3 Pollard v. E.I. Dupont De Nemours, 532 U.S. 843 (2001).
4 See Williams v. Pharmacia, 137 F. 3d 944 (7th Cir. 1998); Kelly v. Airborne Freight, 140 F.3d 335 (10th Cir. 1998).
5 Id. See also EEOC v. W&O, 213 F.3d 600 (11th Cir. 2000); Standley v. Chilhowee, 5 F.3d 319 (8th Cir. 1993).
6 See Williams v. Pharmacia, 137 F. 3d 944 (7th Cir. 1998); Duke v. Uniroyal, 925 F.2d 1413 (4th Cir. 1991).
7 See Duke, 925 F.2d 1413; Carter v. Sedgwick County, 929 F.2d 1501 (10th Cir. 1991).
8 See W&O, 213 F.3d 600; Pharmacia, 137 F. 3d 944.
9 Ford Motor Co. v. EEOC, 458 U.S. 219 (1982).
10 Weaver v. Casa Gallardo, 922 F.2d 1515 (11th Cir. 1991).
11 Reiss and Rosenfeldt, Valuing Economic Damages in Employment Litigation from an Enployee’s Perspective, 76 Fla. B.J. 57 (May 2002) and 76 Fla. B.J. 91 (June 2002).
12 137 F.3d at 953 (1998).
13 See Gorniak v. National Railroad Passenger Corporation, 889 F.2d at p. 483 (3d Cir. 1989).
14 See Pharmacia, 137 F. 3d 944; McKnight v. GM, 908 F.2d 104 (7th Cir. 1990).
15 See Borbour v. Merrill, 48 F. 3d 1170 (DC Cir 1995); Hall v. Claussen, 6 Fed. Appx 655 (10th Cir. 2001); Kelly, 140 F.3d 335.
16 See Downes v. Volkswagan, 41 F.3d 1132 (7th Cir. 1993).
17 See Borbour v. Merrill, 48 F. 3d 1170 (D.C. Cir 1995); Standley, 5 F.3d 319 (8th Cir. 1993); Schwartz v. Gregori, 45 F.3d 1017 (6th Cir. 1995).
18 See Kelly, 140 F.3d 335.
19 While these factors support extending front pay to the normal retirement date, this can only be used as an implicit assumption, by only using inferior employment from a much earlier date achieved.
20 See Munoz v. Oceanside Resorts, Inc., 3 F.3d 1340 (11th Cir. 2000); Lewis v. Federal Prison Industries, Inc., 953 F.2d 1277 (11th Cir. 1992).
21 Paolella v. Browning-Ferris, Inc., 158 F.3d 183 (3d Cir. 1998); Roush v. KFC National Management, 10 F. 3d 392 (6th Cir. 1993).
22 Lewis v. Federal Prison Industries, Inc., 953 F.2d 1277 (11th Cir. 1992).
23 See Selgas v. American Airlines, Inc., 104 F.3d 9 (1st Cir. 1997).
24 Id. at fn. 8.
25 As explained in IRS Notice 2000-26.
Jerry Reiss, Ft. Lauderdale, is licensed by the DOL (and IRS) to do valuation work under ERISA. He is also an associate of the Society of Actuaries. Mr. Reiss provides expert testimony and support services in family and labor law and ERISA. He also publishes newsletters in both family and labor law.
Jesse Hogg is a senior member of Hogg, Ryce and Spence and a former partner of Fowler, White, Humkey and Trenam. He has specialized in labor law since the 1960s. He is admitted to practice before the U.S. circuit courts and the U.S. Supreme Court. He received his law degree from the University of Kentucky College of Law where he also served on the law review editorial board.
This column is submitted on behalf of the Labor and Employment Law Section, Cathy J. Beveridge, chair, and Frank E. Brown, editor.