Back Pay, Front Pay, Benefits and Beyond: Valuing Damages in Employment Litigation

Wrongful termination, wage discrimination, retaliation, failure to promote and other employment disputes almost always involve disagreements over the amount a plaintiff should be compensated for as a result of the defendant’s alleged wrongful actions. The outcome depends on how well the plaintiff’s economic losses are quantified. Economic experts play a crucial role in this process. This article summarizes the elements economic experts are likely to consider in calculating damages in employment disputes.

Lost Earnings: Back Pay and Front Pay

Lost earnings (back pay and front pay) are wages the plaintiff lost as a direct result of the underlying wrongful actions of the defendant. Back pay represents the plaintiff’s lost wages before the date of trial, while front pay refers to projected lost wages after trial. To calculate lost earnings, it is ideal to know the plaintiff’s earnings for several years prior to the alleged wrongful actions. Wage increases, promotions or other progress that might have taken place if the wrongful action had not occurred may also be considered.

For disputes related to failure to hire or failure to promote, information will be needed regarding the job title, start date and compensation the plaintiff would have received in the position that was not obtained. Changes in salary, performance bonuses and/or compensation structure should also be examined.

Any calculation of back pay and front pay should be offset by mitigating earnings the plaintiff has received and/or the plaintiff’s earning capacity following the defendant’s alleged wrongful actions.

Impact on Employment Benefits

Failure to hire or a wrongful termination may prevent the plaintiff from participating in employment benefits, while other employment disputes may result in an adverse impact on the plaintiff’s eligibility for or level of benefits available.

Health insurance

In cases of a failure to hire or wrongful termination, the plaintiff may be without or lose health insurance coverage entirely. Reducing the plaintiff’s hours or changing the work schedule may have resulted in the plaintiff being classified as a part-time employee, thereby losing eligibility for health insurance.

Retirement benefits

Many retirement benefits are a function of the time worked or the plaintiff’s compensation. A reduction in hours worked or eligible compensation used to determine retirement benefits can lower the value of those benefits. The plaintiff could also lose access to retirement benefits or fail to vest in the company’s retirement plan.

Retirement plans generally fall into two categories — defined contribution and defined benefit — but the calculation of their value can vary significantly. Losses related to defined contribution plans, such as 401(k)s, are typically valued based on employer contributions into the plan. Employer contributions can vary by plan and generally can include matching contributions, nonelective contributions and discretionary contributions. The valuation of employer contributions to defined contribution plans is usually based on a percentage of a plaintiff’s eligible compensation, focusing on contributions that were lost due to alleged wrongful actions.

Defined benefit plans, in contrast, require a detailed analysis of both the benefits the plaintiff had already accrued as of the date of the wrongful actions and those they would have continued to earn absent the defendant’s wrongful actions. This often involves examining plan-specific formulas, eligibility and vesting requirements and projecting key inputs used to calculate retirement benefits such as eligible earnings, years of service, hours worked or accrued credits — depending on the design and provisions of the individual plan.

Stock-based compensation

For plaintiffs who received, or would have received, stock-based compensation, employment disputes can have an array of adverse impacts. Plaintiffs may lose vesting rights to stock compensation, be forced to exercise stock options sooner than intended, receive lower levels of benefits or lose eligibility entirely.

Valuing stock-based compensation involves a detailed assessment of the equity type, vesting schedules and the terms under which the stock or options were granted. For stock options, key inputs include the grant price, market price and expiration date. Restricted stock or performance shares often call for projections tied to performance targets.

A thorough analysis must account for both the benefits that have already vested and those that would have vested but for the alleged wrongful actions. This typically involves financial modeling to estimate the future value of the awards.

Tax Considerations

Verdicts and settlements from an employment dispute are subject to income tax liabilities. Depending on the characteristics of the plaintiff and the amount awarded or the settlement amount, the tax liability on the lump-sum award or settlement amount may be greater than the tax liability the plaintiff would have otherwise incurred. Economic experts can help determine what, if any, additional tax liability a plaintiff may incur. Additionally, tax professionals can assist plaintiffs in navigating the tax implications of receiving a verdict or settlement from an employment dispute.

Useful Documents

Attorneys can request the plaintiff’s records for several years before the alleged wrongful actions through the present. It is important to secure records to establish what the plaintiff was earning (or may have earned) prior to the alleged wrongful actions and any mitigating earnings the plaintiff has received thereafter. Examples of such records include:

Pay stubs and earnings statements

These records contain information about the plaintiff’s wages and employment benefits. They typically provide information on the plaintiff’s base rate of pay and may also show the number of hours worked, benefit participation and information on other earnings payments such as overtime, shift differentials and bonuses/commissions.

Form W-2 wage and tax statements

These records summarize the plaintiff’s earnings for a calendar year and can also provide information about employment benefits the plaintiff receives. Form W-2s indicate that the plaintiff is an employee, as opposed to a Form 1099 worker (see below). Form W-2s can also identify state and/or local income taxes for which the plaintiff may be liable. Form W-2s alone may not paint a complete picture, since they do not specify the period in which the plaintiff was paid (if not for the complete calendar year).

Form 1099 and Schedule C (Form 1040)

Not all plaintiffs are W-2 employees. Some are self-employed, work as independent contractors or work “gig” jobs. These plaintiffs receive Form 1099, which reports gross income paid. There are several different types of Form 1099s, and the type of form the plaintiff receives varies depending on the nature of work and payment. Plaintiffs can declare allowable expenses against this income. In this scenario, the plaintiff files a Schedule C summarizing gross income, allowable expenses and reported net profit. It is important to receive the completed Schedule C, as Form 1099 does not accurately represent the plaintiff’s earnings.

Tax returns

Tax returns may provide information on the plaintiff’s income for a calendar year. However, if the plaintiff files jointly with a spouse, their earnings may be combined and reported together. As with Form W-2s, tax returns do not identify the period of the year for which the plaintiff was paid (if not for the complete calendar year). Tax returns also assist with determining what, if any, additional tax liability the plaintiff may incur with a lump-sum verdict or settlement.

Employment benefits plan documents

Documentation of any employment benefits the plaintiff received through their employment at the time of the wrongful actions is important to properly value those benefits. Employees typically receive summary plan descriptions describing the employer-sponsored benefit plans available/offered. These documents outline the eligibility for the plan and how much the employer will contribute toward these benefits. Other documents, such as compensation summaries, retirement account statements or health insurance premium sheets, are also helpful.

Similar plan documents help with understanding and valuing stock-based compensation. These documents can reveal the way stock is awarded, vesting periods and exercise periods. Stock award letters to the plaintiff and statements showing the status of vested, unvested and exercised stock are also useful.

Employment records

These records can contain useful information, such as pay rates, hours worked, periods of employment, earnings progression and details regarding the plaintiff’s type of employment. Such records can also provide information on benefit availability and participation, and any periods of leave the plaintiff may have taken.

Prospective information

Some employment disputes involve positions that the plaintiff never obtained. In these cases, obtaining documentation on prospective compensation may be more difficult. However, any documentation and information from the plaintiff regarding an expected hiring or promotion, earnings and benefits should be provided to the economic expert for review. Information related to other individuals at that position or related to comparable positions, either at the same company or at comparable companies, can also be useful, as well as industry data.

Deposition Testimony and Interviews

Another useful source of information to better understand the plaintiff’s economic losses is the testimony they and their employer provide in their depositions. Depositions provide an opportunity for plaintiffs to explain the underlying issues of the case and how the alleged actions of the defendant(s) impacted their employment and earnings. The deposition of the plaintiff’s employer can provide useful information regarding the plaintiff’s potential growth within the company, as well as company benefits and compensation practices.

Interviewing the plaintiff can also provide valuable insights into economic losses. These interviews allow the economist to ask specific questions about the economic impact of the alleged wrongful actions and to gather information and context that may not be captured through traditional discovery methods.

Reliable Assessments Lead to Better Outcomes

Accurate, objective financial analysis is a critical component in employment litigation. When attorneys provide comprehensive, well-organized documentation, economic experts can deliver reliable damage assessments that support fair outcomes.

Weaver’s team has deep experience in providing expert economic analysis in employment disputes. For more information, contact us.

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