The base earnings are the foundation for establishing an income stream for projecting personal injury lost earnings claims. The damages expert should include any and all sources of earnings at the time of the event that gives rise to the loss. The emphasis is to measure earnings from activities of the plaintiff. Passive income, yields such as stock dividends, interest on bonds, pension payments, or related income are excluded. Although earnings types will vary from case to case, they typically include but are not limited to regular pay and salary, overtime pay, commissions, bonuses and stock options, income from second jobs, self-employment income, and fringe benefits from all jobs, including health insurance, retirement, etc. Perks such as use of a company car, club memberships or similar benefits of a job should also be considered.
SOURCES OF DATA FOR BASE EARNINGS MEASUREMENT
Base earnings are derived from earnings generated by the plaintiff or in some instances, they are obtained from Federal or State databases, and may include the following:
- IRS and State Tax records, W-2’s, or if the person is self- employed, Form 1099’s, Form Schedule C’s, or perhaps corporate income tax forms;
- Company employment records for the plaintiff that show rates of pay, hours or weeks worked, promotions, disciplinary actions, etc.;
- Pay stubs;
- Social Security Administration earnings;
- Union contracts; and
- Earnings of individuals of similar age, education, gender, location, occupation, industry, or union status may be available from federal or state public organizations, trade associations, or private source. In particular, each state maintains a department which provides labor market information, and the federal government’s Census Bureau, Bureau of Labor Statistics provides detailed information on earnings.
ADJUSTMENTS TO BASE EARNINGS
A key issue confronting the forensic accountant is to make sure that earnings at the time of the event were representative or typical. For work involving a high degree of seasonal employment or for a pre-event earnings history marked by a trend up or down, or a partial year’s worth of earnings, adjustments may be needed to measuring base earnings. The forensic accountant needs to proceed with attention both to details and to factors that a judge or jury would understand, especially if not considered or pointed out by opposing counsel.
The forensic accountant would prefer ten years of annual data in order to perform statistical analysis, like regression analysis, that might help detect certain trends. The pattern of each person’s past earnings trends should raise questions leading to added information gathering and analysis. What type of job did an individual have that accounted for such volatility in earnings? Was pay highly variable due to changing geographic location, industry, occupation, typical work hours, variable commissions, or some other reason? Perhaps the individual was not working for periods of time due to work-limiting injury, hospitalization, or other considerations.
Earnings of most workers increase each year due to a combination of inflation and productivity. The latter is due to individual human capital expressed as individual education, general knowledge, and job-specific experience. We may make this adjustment using either the Consumer Price Index (CPI) of the Bureau of Labor Statistics (BLS) or the Employment Cost Index (ECI) also published by BLS. There are certain advantages to the latter to adjust earnings since the ECI measures wages and salary changes, whereas the CPI measures average changes in the prices of goods and services that consumers purchase. Also, arguably the CPI does not directly capture productivity gains, only inflation, and an adjustment which may be appropriate for an older worker but not an individual still gaining human capital.
OTHER CONSIDERATIONS
Adjustments for gaps in work history or temporary unemployment when a limiting event takes place are similar to those made by the damages expert if there is no work history. For example, farm workers, self-employed individuals and temporary military personnel, all have unique circumstances associated with defining and measuring base earnings. There is no simple set of guidelines to use in defining and measuring baseline earnings. In Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 103S. Ct. 2541. 1983), the Supreme Court noted “The most obvious and most appropriate place to begin is with the worker’s annual wage at the time of the injury. Yet the estimate of the loss need not be based solely upon the wages which the plaintiff was earning at the time of the injury.”
If you have a question regarding a personal injury lost earnings case, please contact FAZ Partner Charles Amodio @ camodio@fazforensics.com.
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