Ten Mistakes Plaintiff’s Economists Make in Measuring Economic Losses in Wrongful Discharge Litigation
As published in Litigtion Economics Series, Winter 2014, No.2
1. Projecting Future Losses for Too Long a Time Period
The most often used ending date for projecting lost earnings in wrongful discharge litigation is the worklife expectancy although some economists (usually erroneously) use some arbitrary ending date, such as age 65 or even 67. The worklife expectancy is a statistical construct derived from labor market data which varies by a worker’s age, sex and educational level. However, the relevant ending date in employment litigation, such as in cases involving discharged employees, can be very different. The ending date needs to take into account the ability of the plaintiff to mitigate his or her losses through post-termination employment. It also should reflect the probability that the employee would have stayed in the employ of the defendant.
2. Failure to Consider Research on Probability of Employment With Defendant
It is common to see plaintiff’s economists project uninterrupted losses year-after-year while also assuming with 100% probability that, but for the discharge, the plaintiff would have remained at the employer for the entire assumed loss period. However, employees can leave employers for a whole host of reasons, including finding another job, early retirement, being downsized due to economic reasons… Recent research on the probability of a worker staying with an employer is available. This research shows that these probabilities vary as a function of economic variables, such as education, tenure with employer, income and age. These probabilities decline with each succeeding year of the projection making the losses progressively lower with each succeeding year. Failing to consider such probabilities can result in an exaggerated loss projection.
3. Not Fully Exploring Mitigation
Each dollar of post-termination wages and benefits results in a dollar-for-dollar reduction in the estimated loss. Plaintiffs have an obligation to mitigate their damages. Sometimes the defense may use a vocational or employability expert, in conjunction with an economist, to fully measure the extent to which the plaintiff can mitigate his or her damages and determine what the mitigated losses are. It is important for the defense to also be aware that vocational and employability assumptions are usually outside the expertise of an economist. Therefore, mitigation assumptions are typically provided to the economist who often does not render an independent opinion on them (therefore mistake may not be the appropriate term). A defense vocational expert may shed light on the ability of the plaintiff to pursue gainful employment to mitigate his or her losses. Such opinions/assumptions can then be given to the economist who will measure the extent to which
damages can be mitigated.
4. Failure to Fully Discount Losses
In many jurisdictions, including Federal courts and many states, such as New Jersey, where the rules are similar to those at the Federal level, future losses need to be brought to present value terms. This involves reducing these losses using the relevant discount rate. Using too low a discount rate exaggerates the present value of the loss. Using a version of discounting, the total offset method, usually exaggerates the loss and is often wrong. In addition, the plaintiff’s expert may not fully understand security market returns and how they are different from the quoted rate on a security. Lastly, increased interest rates occurring as a result of the ending of the Federal Reserve bond buying program, also needs to be factored into the determination of the relevant discount rate.
5. Selecting an Anomalous Year Upon Which to Base a Lost Earnings Forecast
Damages experts sometimes pick an anomalous year, such as a year when the plaintiff earned unusually high compensation, and they project those anomalous earnings levels over the entire loss period. Your economist needs to analyze the plaintiff’s work history and determine if the selected year is inappropriate and, if so, what earnings level is more representative of the plaintiff’s employment history.
6. Selecting an Anomalous Year Upon Which to Base a Lost Earnings Forecast
Damages experts sometimes pick an anomalous year, such as a year when the plaintiff earned unusually high compensation, and they project those anomalous earnings
levels over the entire loss period. Your economist needs to analyze the plaintiff’s work history and determine if the selected year is inappropriate and, if so, what earnings level
is more representative of the plaintiff’s employment history.
7. Failure to Conduct Industry and Firm-Specific Research
It is also not unusual to see experts project losses based upon specific employment and industry assumptions while failing to do any research on the industry or the company that is assumed to continuously employ the plaintiff. Many times there are important changes in the industry, such as consolidation, mergers and acquisitions and downsizings that would affect the reasonableness of the projection. These factors could affect the probability of continuous employment with the defendant in a way that would not be captured by the aforementioned research studies which are based upon economy-wide averages.
8. Incorrectly Factoring in OffsettingPension Benefits
Sometimes the combination of a lower pension combined with alternative, post-termination-employment, can result in an earnings stream that partially, or even fully mitigates the plaintiff’s losses. In order to determine if this is the case, the defense needs to hire an economist to accurately measure the “but-for” and post-termination pension projections. Sometimes this analysis can be complicated and plaintiff’s experts may do a “quick and dirty” analysis that exaggerates the losses and results in an inaccurate projection. In such cases, the defendant may be best served by devoting some resources to measuring the pension correctly and determining the true extent to which losses may be mitigated.
10. Inaccurately Measuring the Value of Fringe Benefits
We have already discussed how losses of pension benefit can be inaccurately measured. Losses of other benefits can also be exaggerated. For example, it is often the case that the plaintiff can secure comparable benefits, such as health benefits, from their post-termination employer. Mitigation needs to be fully considered not only in the earnings projection but also in the fringe benefit valuation.