The Florida Bar

Florida Bar Journal

Valuing Economic Damages in Employment Litigation from a Plaintiff’s Perspective, Part I

V aluing economic damages in Title VII cases is more difficult than valuations of personal injury, medical malpractice, and product liability torts, and it is unlike valuing damages for any other plaintiff action (such as breach of contract). Yet the Title VII case often proceeds to trial without a professional valuation. One of the things that distinguishes the Title VII valuation from valuations of all other plaintiff losses is that the Title VII valuation adds a seniority-based benefits loss component which does not fit neatly into a front or back pay calculation. As a loss that generally occurs in the future, when the seniority-based benefits component is the result of a Title VII wrongful termination of employment, it cannot be recovered with new employment even if that employment offers identical benefits. Accordingly, it becomes a permanent loss and this article will demonstrate the permanent loss. As expert testimony before a jury on future damages is often excluded, understanding the Daubert and Kumho Tire line of cases,1 a mong other distinctions of the Title VII valuation process, is essential to a proper presentation to the court and jury on the extent of economic damages in the case.

Part I of this article will begin by showing the valuation issues that drive the economic damages. It will compare Title VII valuation issues to those of other types of plaintiff actions. It will show how the valuation report should be structured to deal with the many problems unique to Title VII damage claims and how properly structuring the expert’s report can help maximize your client’s award. This article will show why the report must be structured differently to deal with the way in which testimony is offered in such cases.

Companies more sensitive to Title VII discrimination problems have certain employee benefit programs designed to deal with those concerns. Whether the company offers such programs or does not is certainly not proof of whether your client suffered discrimination. After all, it is often the employees who work for these companies that are responsible for the discrimination and not company policy. But companies more sensitive to Title VII discrimination problems adopt certain employee benefit programs designed to avoid situations where discrimination might result. Part I will contain a discussion of these programs. Hopefully, this discussion will help the plaintiff’s practitioner determine client credibility on whether the client suffered discrimination and whether to accept the case.

Part II of this article, which will appear in the June issue of The Florida Bar Journal, will show the core valuation issues that must be addressed before the valuation is undertaken. It will begin by identifying the components of loss as they relate to classifications of front and back pay damages, including the seniority-based benefits component. It will show why a decision must be made whether the economic loss will be valued explicitly or implicitly. Each method will be defined and the issues for making the choice will be discussed. Part II also will show that most experts value loss with the Alaskan Method. It will explain what this method is and why it is so appealing yet its use can undermine a proper jury award.

Valuation Issues
• Certainty of Loss

The components of Title VII loss are less certain than with personal injury and other torts. Many actions for damages involve loss of wages and benefits. But when the loss is due to Title VII discrimination, the loss can be more devastating, particularly as it relates to ongoing damages, and sometimes even as it relates to past damages, depending upon a number of factors: 1) whether the plaintiff was psychologically harmed; 2) how long the plaintiff worked for the defendant; 3) the level of education of the plaintiff; 4) the size of the industry under which the proposed loss occurred; 5) whether the loss of health insurance-based benefits contributed to health problems (postseparation), making it more difficult to obtain and hold similar work; and most importantly 6) the unknown human factor that some people can recover from major setbacks more easily than others can recover from minor setbacks.

Valuations of damages that occur as a direct result of Title VII termination of employment have one element so different from all other valuation cases that it alone will drive the valuation process in a different direction than all other actions involving loss. This element is that it is human nature to steer clear of people who are involved in unpopular controversy. A person who files a Title VII action against an employer will have far more difficulty finding new work than someone who can return to work after healing from an injury.2 H ow difficult the task of finding new work can be should be related to the length of tenure of the defendant and also how much in demand the plaintiff’s skills are in the market place. It can also be related to whether the plaintiff was psychologically harmed and how extensive the harm may be.3 T here is also an unknown human factor, as addressed above, that is thrown into the mix of factors to consider.

A second important distinction between Title VII loss and all other valuations is that much of the evidence on the extent of damages is known only by the plaintiff and the defendant. Use of the term defendant as used herein shall be construed to include the employees who work for the defendant. Obviously concerned for their jobs, their testimony will likely be influenced by the defendant. The other major source of information is the plaintiff, who is embittered by the termination and may have a biased outlook. This presents many problems for trying the case. For this reason, it may be essential that the attorney considering representing the party claiming injury investigate his or her claims before accepting the case. But the proof problems for presenting the case to a jury also present valuation problems that need to be dealt with directly. Most of the information that will be used to value the loss will be supplied by the plaintiff. It is important for the valuation report to disclose this problem. A finding of fault will determine whether the defendant is liable, but it will also help bolster the plaintiff’s credibility as a witness. Whether the information that the plaintiff supplied is accurate will be determined at trial. It is not the responsibility of the economic expert to investigate the reasonableness or accuracy of the plaintiff’s claims.

A third important difference is that there can be more than one layer of loss in the Title VII unlawful termination of employment valuation and this additional layer can introduce multiple levels of additional loss with different amounts of uncertainty associated with each one. For example, damages accumulated to the date of trial (as opposed to future damages) are often thought to be determined in a straightforward process. This is often wrong for a number of reasons: When discrimination resulted in termination of employment, it may have likewise caused underemployment in the past.4 I f this component of damages is identified and valued in the report, it will make the matter of valuing past damages less straightforward and far more complicated. While an expert may try to incorporate the underemployment lost income in his valuation, the statute of limitations could make such an analysis subject to challenge. If the issue of underemployment is ignored, the problem doesn’t go away, but manifests itself differently in the calculation of front and back pay. Certainly, employees who were not victims of underemployment, will be promoted over time. The loss is then measured (prospectively) from the time the plaintiff was fired.

When issues of uncertainty exist after the valuation is complete, the valuator must do a number of things. First, the extent of uncertainty must be disclosed. Second, the valued contingency must be calculated so that it is as likely that it is undervalued as it is overvalued. This will help the expert to deal with cross-examination and will also dilute defense counsel arguments on the uncertainty issue. The need to employ this approach when issues of uncertainty exist raises a question on which valuation method to use: explicit or implicit? An explicit valuation is one that measures the amount of loss associated with each contingency of possible damages and values each loss independently. To do an explicit calculation, there must be a body of historical data from which to formulate a set of assumptions. Such reliable data does not exist currently for Title VII work because there is no data which traces Title VII controversies. Therefore, a backdoor (“implicit”) approach is often necessary. The backdoor or implicit approach calculates the total loss by relying on the symbiotic relationship certain economic forces have to each other. For example, unknown future health care costs related to the loss of insurance-based benefits can be high with certain plaintiffs. When this occurs, morbidity ( i.e., the force of deteriorating health) works to increase those health care costs at the same time that it works to lessen the damages with respect to future lost wages.5 T he loss of both can be valued implicitly, by increasing the age on which the plaintiff planned to retire (for income purposes), but projecting the cost of the needed health procedures only on the basis of the employer subsidized portion of the health premiums that were paid. Alternatively, the same loss can be valued implicitly for the person in poor health, by projecting the cost of possible future health care procedures, and decreasing the age of expected retirement.6 E ither way, if one component is overvalued, the method predicts the other will be undervalued, and the sum of the two will more closely approximate the actual loss.

Structuring the Report

The historical purpose of awarding back pay has been to make the employee whole (at the time of the award) for an unlawful termination of employment.7 T he historical purpose of awarding front pay has been to fashion an equitable remedy when the court decides not to order reinstatement of the plaintiff’s job.8 I t is for this reason that the court is vested with the responsibility for making a determination whether front pay may be awarded.9 T he award of back pay can be made by the court or the jury, at the court’s discretion. The awarding of compensatory and punitive damages is a jury function.10 I n making an award of future damages, the court is concerned that it does not award more than will be necessary to compensate the employee for the loss.11 A n award that exceeds actual damages is punitive,12 a nd only the jury can award these damages and the amount it can award is strictly controlled by statute.13 A ccordingly, the report must clearly distinguish front pay from back pay damages.14

Reiterating, if the court submits the issue of the amount of back pay to the jury, the expert (in Florida) will be limited to testimony on back pay. This presents many problems for explaining the past loss to the jury if total damages are valued implicitly. As addressed previously, the implicit method is the best method when insufficient data exists to justify individual assumptions for each loss. The implicit method relies upon the symbiotic relationship that certain economic forces have to each other, where certain overstatements in calculated value cancel understatements, and the assumptions are reasonable in the aggregate. But measured over a short period of time, as typically occurs with back pay, the results of the implicit assumptions can look strange to the lay person, and this affords the defense an opportunity to exploit this result. For this reason, it is recommended that the implicit assumptions be used for total damages, but that the explicit assumptions be used for past loss. Valuation consistency can be achieved by valuing the total damages implicitly, but forcing the future loss as the difference between the total damages (valued implicitly) and the past loss (valued explicitly for testimony purposes).

As there is no body of reliable data that exists to help predict loss of future income (and benefits) resulting from the Title VII termination, the valuator will be forced, in most instances, to base his or her forecast of loss on information supplied by the plaintiff. It is important that this is disclosed in the report and that a disclaimer appears refuting the results if the client is unable to support the information provided at trial. The defense may try to discredit this by claiming bias and arguing that the person who prepared the report is unqualified to value damages when he or she holds no credentials for evaluating hiring practices and other related fields. However, it is reasonable for an expert to rely upon data provided by the plaintiff so long as such data is rational. Persons offered as experts by the defense will be in no better position to accept or refute the plaintiff’s testimony because they too will be unable to predict how your client’s job replacement prospects will be affected as a “whistleblower,” by filing a Title VII action against his or her prior employer. The “whistleblower” theory has already been recognized as valid by certain courts, but has been termed as damage to one’s reputation.15 D ue to the unique nature of the Title VII loss, it is questionable whether a body of reliable information will ever exist. It is this difference that distinguishes Title VII valuations of loss from all others.

The valuation report must contain assumptions upon which the economic loss is based and should disclose how those assumptions were determined.16 I t should also discuss what was valued and describe the valuation method that was utilized and how the chosen valuation method affects the result obtained.17 s tructuring the report in the above fashion, the economic expert deals directly with the weaknesses of a Title VII valuation, but this structuring also affords the plaintiff the opportunity to put every potential valuation issue on the table. The jury (or court) can attach whatever significance it wants to each valuation result based upon the facts proven at trial. Merely avoiding complex issues common to Title VII causes of action accomplishes very little because the jury (and court) will be presented with a smaller amount of damages which defense counsel will attempt to discredit anyway. Again, this is the nature of this type of valuation and the plaintiff would be wise to deal with its shortcomings directly rather than to avoid them.

Role of Employer-provided Benefits

Employee benefits fill a social purpose. Providing health benefits helps ensure that the employees are healthy and are therefore able to work for the employer in the future. The vast majority of employers recognize their vested interest in at least providing subsidized health care coverage for their workers, while other employers recognize that even carrying the burden of health problems of a family member can affect their employees performance at work, and therefore they provide subsidized family coverage as well.18 P roviding retirement benefits allows the company employees to have a continued income into the retirement years. Social security benefits were never designed to meet that need.19 W hen an employer fails to offer a meaningful retirement plan, that employer has made a statement that it is less concerned of its employees’ ability to retire when they get older. This presents a problem with employee retention and could be used as an argument that the employer does not “welcome” older workers, thus buttressing an ADEA claim. This conclusion will be clearer after the ensuing discussion on the steps employers with meaningful retirement plans have recently taken to amend their plans in order to encourage retirement.

Traditional retirement plans for employees who retire with an employer after many years of service had unprecedented growth during the economic expansion following World War II.20 I n recent years, however, many companies have abandoned their traditional plans in favor of the popular 401(k) plans, where the responsibility of the savings has shifted from the employer to the employee.21 4 01(k) plans were never meant to replace traditional retirement plans, and with many companies who adopt them, they served their intended role as extra benefits on top of traditional retirement plan benefits.22 W hen a company offers their employees a traditional defined benefit retirement plan, which provides their employees a monthly retirement benefit, defined in amount, as a stated percentage of their final average salary, this plan creates incentive to retire. For example, an employee who could retire with half of his or her income, but chooses not to, is working for but half of his or her effective income after a potential retirement date. This type of benefit creates tremendous incentive to retire, and most employees retire as a result. However, since the employee could choose to continue to work for full pay, no discrimination results under Title VII. The company is happy with the program because it legally replaces most older employees with younger, potentially more energetic employees who work for less pay.23 W hen the older employees do not elect to retire, the company is paying those employees a substantially reduced (effective) income by not paying retirement benefits for those years.

Many companies have shown an interest in creating the same incentive to retire at much younger ages by adding early retirement subsidies to their traditional retirement plan benefits.24 T here are many ways to fashion this subsidy. It can be fashioned to allow the employee with 25 or more years of service an ability to retire as early as age 55 and begin receiving retirement pay at the earlier age with no reduction in benefits.25 S ome companies create a rule to determine eligibility to retire with subsidized pay at the younger ages, where the requirement for the subsidy is met with a combination of age and service. For example, under the rule of 72, when the employee’s accumulated service with that employer, added to the employee’s age, equals or exceed 72, that person can retire and receive full benefits without a reduction for the earlier ages. Other companies have even created bridge programs, where a tailored plan is offered to each employee consisting of a combination of termination pay and early retirement subsidies if that employee elects early retirement. In each case, a strong incentive to retire is created by the benefit and a good portion of employees will elect early retirement.

There is a growing concern when an incentive to retire is created and then not honored. This can occur with welfare benefits which were promised by the company officials to continue into retirement. One of the things that distinguishes welfare benefits from retirement benefits is that welfare benefits do not vest whereas retirement benefits do.26 S ome employers have hidden behind this distinction in order to avoid meeting their oral (or written) promise to provide benefits. The federal courts have addressed this practice in numerous rulings and have held that when such promise induces employees to retire, the benefits vest at that point, even if the company plan provides otherwise.27 A nother question should be considered when this practice occurs: Is the false inducement a constructive firing for age, prohibited by the ADEA?

Some employers adopt a floating holiday schedule as part of their benefit package. This allows the employee the ability to take certain holidays for religious observance and avoid possible confrontations with their immediate supervisor on whether permission is granted. It can also help avoid confrontations that might otherwise lead to charges of sex discrimination. Other companies adopt affirmative action programs to help deal with sexual and racial discrimination concerns. Affirmative action programs have been criticized recently for allegedly resulting in “reverse” discrimination. The point is that sexual and racial discrimination concerns can be dealt with aggressively without resorting to adopting the affirmative action programs. A good VEBA (Voluntary Employee Benefit Association) plan can provide tuition reimbursement for anyone who wants to advance in the company.28 A ccompanied with an aggressive promote-from-within policy, the two should work to meet those concerns. Some companies have even gone so far as to provide day care for working parents. All of these employee benefit programs work to lessen discrimination on the job. While these same companies can employ people who actively engage in discriminatory policies, the more employee benefits the company offers, the less likely that it will be accused of discrimination.

1 Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993); Kumho Tire Co., v. Carmichael, 525 U.S. 137 (1999).
2 This is one purpose behind awarding front pay damages. See Pollard v. E. I. du Pont, 532 U.S. 843 (2001). This difficulty is no doubt related to the professional injury that one suffers as a “whistleblower.” See Williams v. Pharmacia , 137 F.3d 944 (7th Cir. 1998).
3 Pollard , 532 U.S. 843.
4 This can occur in many ways. For instance, in Pharmacia , the employee complained of sex discrimination for not being promoted and was later fired for retaliatory reasons.
5 That is because the force of morbidity contributes to disabling illness.
6 Here the method is implicit because the future loss relates to the loss that would have occurred had the onset of illness had not undermined the plaintiff’s ability to work. The theory behind this method is that the loss of insurance based benefits contributed to the worsening of a plaintiff health condition that existed before the firing.
7 Williams v. Pharmacia, Inc. , 137 F.3d 944 (7th Cir. 1998). Also see Fox against City University of New York, Bronx Community College and Research Foundation of the City University of New York , 1998 U.S. Dist Lexis 18972 (S.D. N.Y. 1998).
8 Id . Also see Whittlesey v. Union Carbide Corp. , 742 F.2d 724 (2d Cir. 1984). Also see Pollard , 532 U.S. 843.
9 The Civil Rights Act of 1991 provides either side the right to demand a jury trial. It would appear that the 11th Circuit has interpreted its responsibility to determine whether front pay may be awarded based upon, among other things, its continued legal and practical ability to order reinstatement of the plaintiff’s job. See Ramsey v. Chrysler First, Inc. , 861 F.2d 1541 (11th Cir. 1988); Gerry, Flutie, et al., v. The City of Hialeah, 152 F. Supp. 2d 1350 (S.D. Fla. 2001) .
10 Id .
11 This was the obvious concern in Hipp v. Liberty National Life , 39 F. Supp. 2d 1355 (M.D. Fla. 1999); and Castle v. Sangamo Western , 650 F. Supp. 2d 252 (M.D. Fla. 1986). This concern was criticized leading to reverse on appeal. See 837 F.2d 1550 (11th Cir. 1988).
12 Punative damages may only be awarded after a showing that the discrimination was wilful and reckless. See Civil Rights Act of 1991, 42 U.S.C. §1981a(b)(1).
13 See 42 U.S.C. §1981a(b)(3).
14 The U.S. Supreme Court has distinguished compensatory and punitive damages from front pay damages and found that the statutory cap did not apply to front pay damages. See Pollard, 532 U.S. 843.
15 See Williams v. Pharmacia, Inc. , 137 F.3d 944 (7th Cir. 1998).
16 Pacquin, C.Y., The Actuary as an Expert Witness , Society of Actuaries Transactions (1983) p. 417–465.
17 Id .
18 Eilers, R.D., Group Insurance Handbook chs. 2 & 5.
19 McGill, D., Fundamentals of Private Pensions (4th ed. 1979) at p. 93.
20 Id . at p. 26–27. Also see Wall Street Journal Financial Staff, Lifetime Guide To Money (1st ed.) p. 188–190; and Retirement Planner , planner/pensions.htm, Social Security Online.
21 See speech of David Strauss, director, Pension Benefit Guranty Corp. before Corporate Legislative Benefits Forum, Washington, D.C. (6/15/98)
22 Id . This is easily deduced by the small maximum dollar limitation imposed on elective deferrals. Furthermore, most employees simply cannot afford to provide for their own retirement.
23 McGill, D., Fundamentals of Private Pensions (4th ed. 1979) p. 21–22.
24 Id . at p. 119.
25 Id .
26 See ERISA §201(1). Also see Anderson v. Alpha Portland Industries, Inc. , 836 F.2d 1512 (8th Cir. Mo. 1988); and In re White Farm Equip. Co. , 788 F.2d 1186 (6th Cir. 1986).
27 See In re Unisys Corp. Retiree Medical Ben. , 57 F.3d 1255 (3d Cir. 1995); and Wise v. El Paso Natural Gas Co., 986 F.2d 929 (5th Cir. 1993).
28 26 U.S.C. §501(c)(9).

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 articles on valuation topics, nine of which were published in state bar journals. He provides expert testimony and support services. Mr. Reiss’ 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 Florida Bar 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.