Guidance for calculating economic losses in 8th Circuit employment cases
Vol. 76, No. 5 / Sept. - Oct. 2020
Charles L. Baum II
Charles L. Baum II is a professor of economics at Middle Tennessee State University, where he has taught since 1999. He received his Ph.D. in economics from the University of North Carolina-Chapel Hill. Baum is a member of the National Association of Forensic Economists and the American Academy of Economic and Financial Experts. He has served as an economics expert for plaintiffs and defendants in numerous cases. Contact: email@example.com or 615-556-9287.
Wrongfully terminated workers may seek compensation for their damages through litigation. Lawyers representing parties to such litigation may ask a forensic economist to calculate the present value of economic losses from lost earnings in employment termination cases for the court. This article reviews eight important elements that should be addressed when calculating lost earnings: pay, benefits, worklife, mitigation, raises, present value, interest, and taxes. The article also reviews guidance from 8th Circuit case law for each element.
Awarding economic damages for lost earnings in employment cases may become more prevalent. This is because the United States Supreme Court recently determined (in Bostock v. Clayton Cty., Ga., No. 17-1618 (June 16, 2020)) that LGBT workers are protected by Title VII of the 1964 Civil Rights Act. This ruling was in response to disagreement among several federal circuit courts over whether these protections extend to workers on the basis of sexual orientation and gender identity.2 The Civil Rights Act already protects workers on the basis of race, color, national origin, sex, and religion.
Back and Front Pay
Federal courts in employment termination cases seek to make victims of discrimination whole by awarding damages for lost pay.3 Terminated plaintiffs may be compensated for both lost back pay, which includes lost earnings from the date of the discharge to the present (or trial),4 and lost front pay,5 which includes lost earnings between the date of judgment and the date of projected retirement.6 In the 8th Circuit, front pay is disfavored to reinstatement and is only awarded instead of (not in addition to) reinstatement under certain circumstances.7 The circumstances that would make reinstatement impractical or impossible include a strained relationship between the worker and employer8 or animosity and hostility between the parties.9 Economists have provided the lost pay calculations for the court.10 Factors in the 8th Circuit to consider when calculating damages for lost front pay include: “(1) the plaintiff's age; (2) the length of time the plaintiff was employed by the defendant employer; (3) the likelihood the employment would have continued absent the discrimination; (4) the length of time it will take the plaintiff, using reasonable effort, to secure comparable employment; (5) the plaintiff's work and life expectancy; (6) the plaintiff's status as an at-will employee; (7) the length of time other employees typically held the position lost; (8) the plaintiff's ability to work; (9) the plaintiff's ability to work for the defendant-employer; (10) the employee's efforts to mitigate damages; and (11) the amount of any liquidated or punitive damage award made to the plaintiff” (citations excluded).11
Damages for lost employment benefits are awardable in 8th Circuit employment termination cases.12 Examples of employment benefits include “pensions, paid vacation time, and unemployment insurance.”13 Economists have assisted the court by calculating the present value of lost employment benefits for damage awards, typically using either the actual value of the benefits,14 projecting the value of employment benefits as a percent of wages (e.g., employment benefits equal 28% of wages),15 or using the national average employer cost of the benefits.16 However, there is a split among the federal circuits as to whether to award damages for lost health and life insurance benefits when the terminated worker did not pay to replace those lost benefits and incurred no medical costs. The 8th Circuit was one of the first circuits to stipulate that damages for lost health and life insurance benefits should only equal actual out-of-pocket replacement costs, if any, or medical expenses incurred, if any, when the lost insurance was not replaced.17
Remaining Worklife Expectancy
When awarding compensation for lost front pay, the fact-finder must address the proper duration during which damages accrue.18 Courts in the 8th Circuit have based damages for lost front pay on specific number of years, such as 10 years,19 or common retirement ages, such as 65.20 Courts may also base damages on remaining worklife expectancy.21 Economists define worklife expectancy to be the remaining years of work in the labor force before final retirement and have calculated remaining worklife for the court using government data.22
Terminated workers have a duty to mitigate their losses by searching for comparable replacement employment.23 Economic losses from lost pay should then be calculated with mitigation earnings subtracted.24 If the terminated plaintiff did not adequately attempt to mitigate damage, then the pay that could have been earned from comparable replacement employment should be determined and subtracted from the economic losses.25 Terminated plaintiffs must put forth an honest, good faith effort searching for comparable replacement employment, but it is not required for that effort to be successful.26 The plaintiff “need not go into another line of work, accept a demotion or take a demeaning position.”27 If comparable employment is found, then it must be kept28 – and the plaintiff cannot quit.29
The defendant has the burden of proving the plaintiff did not take sufficient action to mitigate damage.30 Specifically, the defendant must prove that substantially comparable jobs were available and that the plaintiff was not reasonably diligent searching for them.31 Recently, some other federal circuits have relaxed this requirement, making it unnecessary for the defendant to prove the existence of comparable positions when the plaintiff does not use reasonable care and diligence searching,32 but the 8th Circuit has not.
Generally, a collateral source rule prevents third-party income and benefits from being offset from a damage award. Many other federal circuits leave the deduction of collateral benefits to the discretion of the court in employment termination cases,33 but the 8th Circuit treats collateral benefits as a legal matter whereby the terminating employer receives no credit, in the form of a reduced damage award, from monies paid to the plaintiff from collateral sources. This is partly to deter future discrimination.34 Collateral sources not to be deducted include unemployment benefits, Social Security income, and workers’ compensation.35 Pension income may also be considered collateral,36 at least partially because it was earned by the plaintiff.37
Economic data shows that wages historically have grown over time with prices and labor productivity. Wages also tend to increase over a career as workers acquire experience and skills. Courts in the 8th Circuit recognize the tendency for wages to grow (e.g., the circuit court remanded the case for lost back pay to be recalculated with salary increases),38 and forensic economists have included wage growth in their calculations of lost front pay (e.g., 4% annual wage growth in one case),39 but 8th Circuit courts do not always explicitly account for wage growth when awarding damages for lost front pay.40 Other federal circuits have expressed a preference for wage growth to be based on government statistics or the plaintiff’s history of pay raises and have denied wage growth adjustments when this evidence is absent.41
Discounting to Present Value
Future losses should be discounted to present value in 8th Circuit employment cases.42 A present value is the amount now – today – that a future sum of money is worth. Future sums are discounted – or shrunk – to present value such that when the sum today is invested it will grow with interest to the future amount. Thus, the higher the interest rate used for discounting, the smaller the present value of future losses will be. The United States Supreme Court has advised that the appropriate interest rate to be used for present-value discounting should be that used on “the best and safest investments.”43 In practice, forensic economists calculating the present value of future losses for the court typically use rates on government securities.44
In several exceptions, courts in the 8th Circuit have not made any explicit adjustment to discount future losses to present value because the effects of inflation and wage growth on future earnings were also not incorporated.45 In these instances, the court has assumed that the interest rate used for present-value discounting and the inflation rate (or wage growth rate) are equal, which is an approach known as the “total-offset method.”46
In the 8th Circuit, the court has discretion to award pre-judgment interest on economic losses.47 Pre-judgment interest not only helps to compensate plaintiffs for their monetary damages, it also promotes settlements and discourages unfair litigation delays where liability and damages are largely certain.48 When determining whether to award pre-judgment interest, the court should consider whether the damage award would otherwise make the plaintiff whole.49 When calculating pre-judgment interest in employment cases, the 8th Circuit has used the IRS prime rate, state statutory rates, and the federal post-judgment interest rate specified in 28 U.S.C. § 1961, which is the rate on the 52-week Treasury bill,50 with the last of these becoming preferred more recently.51 It is also left to the discretion of the court in the 8th Circuit whether pre-judgment interest should compound monthly, annually, or not at all (e.g., simple interest with no compounding).52
Awards for lost earnings in employment cases are taxable as wages.53 A large lump-sum damage award for lost earnings may be taxed at a rate that is different – and likely higher – than the earnings otherwise would have been taxed by moving the terminated plaintiff into a higher tax bracket. Historically, courts in the 8th Circuit have declined to make tax adjustments when awarding economic damages in employment cases.54 Some 8th Circuit courts have refused to make tax adjustments when evidence to guide such an adjustment is not provided – not necessarily because adjustments are not permitted.55 Recently, the 7th Circuit in employment cases has begun to compensate plaintiffs for adverse tax effects,56 as now does the 3rd Circuit when expert testimony from a forensic economist regarding the necessary adjustment is provided,57 and one court in the 8th Circuit now has as well.58
Eight important elements must be addressed when calculating economic damages in employment termination cases. This article summarizes the stipulations and guidance provided by federal statutes and 8th Circuit case law for these elements. It also notes differences between the 8th Circuit and other federal circuits. It is important for lawyers to understand the methods and techniques that are permissible to avoid mistakes. The United States Supreme Court’s recent ruling in Bostock v. Clayton Cty., Ga. will likely make economic damages in employment cases more prevalent.
1 Charles L. Baum II is a professor of economics at Middle Tennessee State University, where he has taught since 1999. He received his Ph.D. in economics from the University of North Carolina-Chapel Hill. Baum is a member of the National Association of Forensic Economists and the American Academy of Economic and Financial Experts. He has served as an economics expert for plaintiffs and defendants in numerous cases. Contact: firstname.lastname@example.org or 615-556-9287.
2 Zarda v. Altitude Express, Inc., 883 F.3d 100 (2d Cir. 2018) addresses sexual orientation in the 2nd Circuit; Equal Emp’t Opportunity Comm’n v. R.G. & G.R. Harris Funeral Homes, Inc., 884 F.3d 560 (6th Cir. 2018) addresses gender identity in the 6th Circuit; and Bostock v. Clayton Cty. Bd. of Comm’rs, 723 Fed. Appx. 964 (11th Cir. 2018) addresses sexual orientation in the 11th Circuit. All three cases involve an employment termination.
3 Cowan v. Strafford R-VI Sch. Dist., 140 F.3d 1153, 1160 (8th Cir. 1998).
4 Paxton v. Union National Bank, 688 F.2d 552, 574 (8th Cir. 1982).
5 Newhouse v. McCormick & Co., Inc., 110 F.3d 635, 641 (8th Cir. 1997).
6 Folz v. Marriott Corp., 594 F. Supp. 1007, 1018 (W.D. Mo. 1984).
7 Sellers v. Mineta, 358 F.3d 1058, 1063 (8th Cir. 2004).
8 Newhouse v. McCormick & Co., Inc., 110 F.3d 635, 641 (8th Cir. 1997).
9 Cox v. Dubuque Bank & Trust Co., 163 F.3d 492, 498 (8th Cir. 1998).
10 Prine v. Sioux City Cmty. Sch. Dist., 95 F. Supp.2d 1005, 1011 (N.D. Iowa 2000).
11 Ogden v. Wax Works, Inc., 29 F. Supp.2d 1003, 1015 (N.D. Iowa 1998).
12 Paxton v. Union National Bank, 688 F.2d 552, 574 (8th Cir. 1982).
13 EEOC v. Rath Packing Co., 787 F.2d 318, 339 (8th Cir. 1986).
14 Prine v. Sioux City Cmty. Sch. Dist., 95 F. Supp.2d 1005, 1014 (N.D. Iowa 2000).
15 Equal Employment Opportunity Commission v. New Prime, Inc., 2015 WL 13731372, at *2 (W.D. Mo. 2015).
16 Dollar v. Smithway Motor Xpress, Inc., 787 F. Supp.2d 896, 916 (N.D. Iowa 2011).
17 Tolan v. Levi Strauss & Co., 867 F.2d 467, 470 (8th Cir. 1989).
18 Baker v. John Morrell & Co., 263 F.Supp.2d 1161, 1184 (N.D. Iowa 2003).
19 Hukkanen v. International Union of Operating Eng’rs, Hoisting & Portable Local No. 101, 3 F.3d 281, 286 (8th Cir. 1993).
20 Roswick v. Mid Dakota Clinic, P.C., 2019 WL 5964553, at *10 (D. N.D. 2019).
21 Ogden v. Wax Works, Inc., 29 F. Supp.2d 1003, 1015 (N.D. Iowa 1998).
22 Prine v. Sioux City Cmty. Sch. Dist., 95 F. Supp.2d 1005, 1012 (N.D. Iowa 2000).
23 Denesha v. Farmers Ins. Exch., 161 F.3d 491, 502 (8th Cir. 1998).
24 Ogden v. Wax Works, Inc., 29 F. Supp.2d 1003, 1021 (N.D. Iowa 1998).
25Sellers v. Mineta, 358 F.3d 1058, 1066 (8th Cir. 2004).
26 Brooks v. Woodline Motor Freight, Inc., 852 F.2d 1061, 1065 (8th Cir. 1988).
27 Ford Motor Co. v. E.E.O.C., 458 U.S. at 231, 102 S. Ct. at 3065, 73 L. Ed. 2d 721 (1982).
28 E.E.O.C. v. Delight Wholesale Co., 973 F.2d 664, 670 (8th Cir. 1992).
29 Baker v. John Morrell & Co., 263 F. Supp.2d 1161, 1179 (N.D. Iowa 2003).
30 Excel Corp. v. Bosley, 165 F.3d 635, 639 (8th Cir. 1999).
31 Coleman v. City of Omaha, 714 F.2d 804, 808 (8th Cir. 1983).
32 Greenway v. Buffalo Hilton Hotel, 143 F.3d 47, 53 (2nd Cir. 1998).
33 E.g., Dailey v. Societe Generale, 108 F.3d 451, 456 (2nd Cir. 1997).
34 Gaworski v. ITT Comm. Fin. Corp., 17 F.3d 1104, 1113 (8th Cir. 1994).
35 Salitros v. Chrysler Corp., 306 F.3d 562, 573 (8th Cir. 2002).
36 Doyne v. Union Elec. Co., 953 F.3d 447, 451 (8th Cir. 1992).
37 Smith v. World Ins. Co., 38 F.3d 1456, 1466 (8th Cir. 1994).
38 Hawkins v. Anheuser Busch, Inc., 697 F.2d 810, 816 (8th Cir. 1983).
39 Dollar v. Smithway Motor Xpress, Inc., 787 F.Supp.2d 896, 924 (N.D. Iowa 2011).
40 Ogden v. Wax Works, Inc., 29 F.Supp.2d 1003, 1021 (N.D. Iowa 1998).
41 Sennello v. Reserve Life Ins. Co., 667 F. Supp. 1498, 1516 (S.D. Fla. 1987).
42 Baker v. John Morrell & Co., 263 F. Supp.2d 1161, 1187 (N.D. Iowa 2003).
43 Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 537, 103 S. Ct. 2541, 2550, 76 L. Ed. 2d 768 (1983).
44 Equal Employment Opportunity Commission v. New Prime, Inc., 2015 WL 13731372, at *2 (W.D. Mo. 2015).
45 Ogden v. Wax Works, Inc., 29 F. Supp.2d 1003, 1021 (N.D. Iowa 1998).
46 Approaches used in other circuits (but not the 8th Circuit) include a “net discount rate” of 2% in the 2nd Circuit (Buckley v. Reynolds Metals Co., 690 F. Supp. 211, 217 (S.D. N.Y. 1988)) and a “below-market” discount rate in the 11th Circuit (Shealy v. City of Albany, 137 F. Supp.2d 1359, 1368 (M.D. Ga. 2001)).
47 Smith v. World Ins. Co., 38 F.3d 1456, 1467 (8th Cir. 1994).
48 EEOC v. Rath Packing Co., 787 F.2d 318, 333 (8th Cir. 1986).
49 MacDissi v. Valmont Indus., Inc., 856 F.2d 1054, 1061 (8th Cir. 1988).
50 Hite v. Vermeer Mfg. Co., 361 F. Supp.2d 935, 949 (S.D. Iowa. 2005).
51 Roswick v. Mid Dakota Clinic, P.C., 2019 WL 5964553, at *11 (D. N.D. 2019).
52 Hite v. Vermeer Mfg. Co., 361 F. Supp.2d 935, 949 (S.D. Iowa 2005).
53 United States v. Burke, 504 U.S. 229, 112 S. Ct. 1867, 119 L. Ed.2d 34 (1992).
54 Hukkanen v. International Union of Operating Eng’rs, Hoisting & Portable Local No. 101, 3 F.3d 281, 287 (8th Cir. 1993).
56 Equal Emp’t Opportunity Comm’n v. N. Star Hospitality, Inc., 777 F.3d 898, 904 (7th Cir. 2015).
57 Eshelman v. Agere Systems, Inc., 554 F.3d 426, 441 (3rd Cir. 2009).
58 Weems v. Tyson Foods, Inc., 2010 WL 11537775, at *5 (W.D. Ark. 2010).