Financial experts play a critical role in wrongful termination cases and other types of employment litigation, particularly in estimating lost earnings. Such calculations tend to be complicated because experts must account for everything from earnings to retirement plan bene?ts to group insurance rates.
ACTUAL AND PROJECTED EARNINGS
The expert’s initial focus generally is on the employee’s “base earnings.” This represents the earnings rate for a specific year or group of years from which lost earnings will be extrapolated. The facts of the case will determine whether the base earnings will use the actual earnings in the year before an employee was terminated, the projected earnings for the year the termination occurred or the expected rate of earnings for a year in the future.
Several types of data are needed to reach a figure for base earnings. They include:
- Employer records,
- Employee pay stubs,
- Income tax records,
- Social Security records ,
- Census information, and
- The earnings of comparable employees in the industry or company.
Information related to an employee’s seniority, health history or productivity declines can provide additional insight if the employee’s earnings record doesn’t reflect regular annual increases. Damages experts might also make adjustments for seasonal variations and sick pay. One-off, nonrecurring payments, such as a nonperformance-based bonus, have the potential to skew base earnings, as well.
BENEFITS AND PERKS
Appropriate compensation for lost pension benefits depends on the type of plan involved. For defined contribution plans, employer contributions are considered as a portion of lost earnings in the years the contributions would have been made. Rather than projecting the postretirement benefits to be paid, the expert calculates the sum of the but-for employer contributions to the but-for earnings.
Calculations for defined benefit plans, on the other hand, may require projection of the actual benefit stream following the employee’s retirement. Relevant factors include years of service, salary levels, retirement date and life expectancy. One common approach to calculating life expectancy uses an average life span to project the full benefits up to the estimated time of death.
To determine compensation for fringe benefits, experts compare the benefits received before the alleged wrong to those received after, possibly taking into account the replacement cost of the lost benefits. Individual insurance rates, for example, may be higher than those paid under an employer-sponsored group plan. Experts distinguish between benefits that depend on the recipient’s level of income and benefits that depend merely on being employed.
Experts also closely scrutinize those benefits to which both the employer and the employee contribute. The employee would be doubly compensated if damages were paid for his or her contribution and lost wages. Double recovery also could happen if vacation and sick pay are added to gross earnings.
WHEN THE PARTIES DISAGREE
Lost earnings claims can trigger several areas of dispute between parties, such as the effect of variable components of compensation. Commissions, overtime and performance bonuses must be clarified. The employee’s duty to mitigate his or her damages can raise questions, too. Defendants may argue that the employee took an unreasonable amount of time to land a new job or accepted a position at an unreasonably low pay rate.
The loss period which can range from several months to the plaintiff’s entire work life, may be a subject of contention, too. Selecting an appropriate period requires analyzing a variety of factors, including the plaintiff’s likelihood of securing comparable employment and the need for specialized training to qualify for a new job.
The parties may further disagree over how to handle the plaintiff’s future compensation increases as they relate to retirement and mortality. The availability of specialized data that accounts for lifestyle choices, such as smoking, makes even the selection of work-life expectancy tables and statistics subject to debate.
Once experts determine lost earnings and the loss period, they select an appropriate interest rate (often based on local statutory or case law) to discount projected earnings to present value.
A HELPING HAND
Employment litigation requires financial expertise. Involve an expert early in a case so he or she can help you weigh your options and evaluate your evidentiary needs.
This article was written and published by Dennis Frankeberger, CPA/CFF, CFE 909-597-1100.
The Partners of Frankeberger Vausher + Company, CPAs and Litigation Consultants, have in excess of 35 years professional litigation and expert witness experience. We consult with clients, their attorneys and or accountants on the matters listed above in support of confrontational issues requiring settlement and or potential equitable adjustments. We have the technical expertise to analyze complex situations, assist with discovery, and render independent, professional opinions.
Frankeberger Vausher + Company includes CPAs, Forensic Accountants, Certified Fraud Examiners, and includes an expert with a Master’s Degree in Taxation. Dennis Frankeberger – Managing Partner, is also the Chairman of the Board of Advisors to The Leventhal School of Accounting at the University of Southern California. He has lectured extensively regarding matters of Internal Control, Discovery, Fraud, Ethics and Taxation.
- Litigation and Arbitration – Wrongful Employment Termination
- Lost Profit Analysis – Business Damages
- Mergers & Acquisitions – Lost Earnings
- Business Valuations – Due Diligence
- Contract Disputes – Wrongful Franchise Termination
- Forensic Accounting – Fraud & Embezzlement Investigation
- Family Law – Expert Witness Testimony
For more information, please contact Dennis Frankeberger, CPA/CFF, CFE 909-597-1100
Email address: FV@FVCPAs.com