Calculating Economic Losses in Tenth Circuit Employment Termination Cases
August / September 2020
This article reviews Tenth Circuit guidance on addressing economic damage calculations for lost pay in employment termination cases.
The Civil Rights Act protects workers from discrimination on the basis of sex, race, color, national origin, and religion. Similarly, the Age Discrimination in Employment Act (ADEA) protects workers on the basis of age, the Americans with Disabilities Act on the basis of disability, and the Family and Medical Leave Act on the basis of pregnancy. These legal protections have recently been extended.
Three federal circuit courts reached conflicting opinions regarding whether Title VII protections through the Civil Rights Act are provided for workers on the basis of sexual orientation and gender identity in employment cases. As a result, the US Supreme Court reviewed these cases and recently determined in Bostock v. Clayton County, Georgia that employment protections extend to workers on the basis of sexual orientation and gender identity. Consequently, economic damage awards for lost pay will likely now become more prevalent.
Attorneys may ask an accountant or economist to calculate the present value of a plaintiff’s economic damages for the court. This article examines eight key elements to be addressed when calculating economic damages from lost pay in employment termination cases: back and front pay, employee benefits, work life expectancy, mitigation and collateral benefits, pay increases, net present value, prejudgment interest, and tax differentials. The article focuses on guidance from the Tenth Circuit for calculating these elements.
Back and Front Pay
Federal courts attempt to make wronged plaintiffs in employment termination cases whole with awards for lost pay. Plaintiffs may be awarded damages for lost back pay, from the discharge to the trial, and lost front pay, from the trial onward. In the Tenth Circuit, reinstatement is preferred to a front pay award, and front pay is only awarded when (1) the employer is hostile, (2) it is impossible for the working relationship to be amicable, or (3) animosity caused by the lawsuit has irreparably damaged the employer-employee relationship.
Economists may calculate damages for lost pay for the court. Factors the Tenth Circuit considers when awarding damages for lost front pay include:
work life expectancy, salary and benefits at the time of termination, any potential increase in salary through regular promotions and cost of living adjustment, the reasonable availability of other work opportunities, the period within which a plaintiff may become re-employed with reasonable efforts, and methods to discount any award to net present value.
A meaningful portion of a worker’s compensation—about 30%, on average—is provided in the form of employee benefits. Damages for lost employee benefits are awardable in federal employment termination cases. Examples of employee benefits that Tenth Circuit courts have considered as damages include lost “medical, dental, and vision benefits” and “the ability to participate in the company’s 401(k), short-term disability, life insurance, and accidental death and dismemberment plans.”
Economists and accountants have calculated for the court the value of lost employee benefits, including the value of lost stock options. For these valuations, some economists have used national average employee benefit rates. Courts have also projected the value of lost employee benefits as a percent of annual salary (e.g., employee benefits equal 15% of pay).
Federal circuits are split in employment cases about whether to measure damages for lost health insurance benefits as the terminated worker’s actual out-of-pocket replacement expenses (or subsequent medical costs when the health insurance was not replaced) or the premium costs to the terminating employer. The Tenth Circuit has used both procedures, but a new approach was recently proposed in a district court within the Tenth Circuit where lost back health insurance benefits would be based on a plaintiff’s replacement costs, and lost future health insurance benefits, for which there cannot yet be out-of-pocket expenses, would be projected as a percentage of pay.
Work Life Expectancy
Courts must specify an end date when awarding lost front pay. Courts in the Tenth Circuit have awarded lost pay for relatively short periods, such as two years of back pay and no front pay, and for relatively long periods, such as 13 years of lost front pay. The Tenth Circuit suggests considering the period represented by work life expectancy. Economists define work life expectancy to be remaining years in the labor force and have calculated work life expectancy for the court to common retirement ages, such as age 65 or 70.
Mitigation and Collateral Benefits
Terminated workers are obligated to mitigate damages by searching for suitable alternative employment. Economic losses should then be calculated as lost pay reduced by actual or projected earnings from mitigation.
Damages for lost back or front pay are not precluded by inadequate mitigation, but the damage award for lost pay should be reduced by the amount that the plaintiff could have earned from comparable alternative employment. The plaintiff “need not go into another line of work, accept a demotion, or take a demeaning position.” Further, terminated plaintiffs are not required to be successful in their mitigation efforts, but they must put forth reasonable exertion to mitigate damages.
The burden of proving that the plaintiff failed to adequately mitigate damage rests with the defendant. In the Tenth Circuit, the defendant must prove both the existence of suitable alternative positions and that the plaintiff did not use reasonable care and diligence seeking them. This is different than several other federal circuits, where it is now no longer necessary to provide evidence of suitable alternative positions when the plaintiff has not used reasonable, diligent efforts to search for them. Unlike these circuits, the Tenth Circuit has not relaxed this requirement.
A collateral source rule generally precludes the deduction of third party benefits from a damage award. In employment cases, courts in most federal circuits, including the Tenth Circuit, retain discretion to deduct collateral benefits. Collateral benefits that cannot be deducted in the Tenth Circuit include unemployment benefits and disability benefits.
However, severance pay from the terminating employer would not constitute a collateral benefit and should be offset from the damages. Results for other types of benefits are mixed. Social Security income has been deducted in some cases, but not others; similarly, pension income has been deducted in some cases, but not others.
Economic statistics show that wages grow over time, due to price inflation and advances in labor productivity, and with age, as workers are trained and gain experience over a career. One of the factors to consider when awarding front pay in the Tenth Circuit is “potential increase[s] in salary through regular promotions and cost of living adjustment[s].”
Economists and accountants have included wage increases in their front pay calculations (e.g., 3.5% annually in one case), but Tenth Circuit courts do not always explicitly incorporate wage growth in damage awards for lost front pay. Other federal circuits have denied adjustments for wage growth as too speculative, absent expert testimony or evidence of past patterns of wage increases.
Net Present Value
Future losses in Tenth Circuit employment cases should be discounted to “net present value.” This is because a lump sum paid today (or at the time of judgment) can grow with interest over time if invested. The present value is the amount of money today that, when invested, will grow with interest to equal the future sum of money. The lower the discount (or interest) rate, the larger the present value of future losses must be. The US Supreme Court has concluded that the interest rate used for present value discounting should be based on “the best and safest investments.”
Various approaches for calculating present value have been used in the Tenth Circuit, and the method of first including wage growth and then separately discounting lost future pay to present value has long been approved of. However, some courts in the Tenth Circuit have used a “net discount rate,” which equals the interest rate for discounting minus the wage growth rate. This approach assumes the difference in the interest rate on investments and the rate of wage inflation are constant and accounts for both simultaneously with one rate—the net discount rate. Forensic economists in this circuit have debated whether an appropriate net discount rate is 2% or 4%, and a recommended range of 1% to 3% was cited by one court within the Tenth Circuit.
In a third approach, several courts in the Tenth Circuit have explicitly refrained from adjusting future losses for present value or for subsequent pay increases. This approach, known as the “total-offset method,” is based on the assumption that the discount rate and wage growth rate are equal and cancel each other out.
Courts in the Tenth Circuit have the discretion to award prejudgment interest on economic losses, but prejudgment interest is not a right and has been denied.The court must determine whether prejudgment interest would “compensate the injured party” and whether “equities would preclude the award.” When awarded, prejudgment interest compensates for the monetary value of the loss from the time of the loss to the payment of the judgment. Each loss accrues incrementally, as each wage would have been earned, until payment of the damage award.
Courts within the Tenth Circuit also retain discretion to set the appropriate interest rate. Rates typically used include state statutory rates, the federal post-judgment rate set forth in 28 USC § 1961 (the rate on 52-week treasury bills), and the IRS rate set forth in 26 USC § 6621 (the federal short-term rate plus 3%). A formula set forth in Reed v. Mineta provides for compounding interest.
Victims of discrimination may face additional tax liability from a large lump-sum damage award for lost earnings in employment cases, because such awards are taxable as wages and may move the plaintiff into a higher tax bracket. Courts in the Tenth Circuit have the discretion to adjust damage awards for differential tax liabilities in employment cases.
Historically, the Tenth Circuit concluded that tax adjustments were not typically appropriate. More recently, this circuit has joined other federal circuits, including the Third and Seventh Circuits, in providing these adjustments with greater frequency, partly due to changes in the federal tax code. Expert testimony from an economist may be useful to quantify the necessary tax adjustment.
The Tenth Circuit looks at eight key elements when addressing economic damage calculations for lost pay in employment termination cases. Attorneys should become familiar with permissible methods of damage calculations and follow the Tenth Circuit’s guidance when handling cases within this circuit.
1. 42 USC §§ 2000e et seq.
2. 29 USC §§ 621 et seq.
3. 42 USC §§ 12101 et seq.
4. 29 USC §§ 2601 et seq.
5. Zarda v. Altitude Express, Inc., 883 F.3d 100, 106 (2d Cir. 2018) (holding that sexual orientation discrimination constitutes a form of discrimination in violation of Title VII); Equal Emp’t Opportunity Comm’n v. R.G. & G.R. Harris Funeral Homes, Inc., 884 F.3d 560, 574 (6th Cir. 2018) (holding that discrimination on the basis of transgender and transitioning status violates Title VII); and Bostock v. Clayton Cty. Bd. of Comm’rs, 723 Fed. Appx. 964 (11th Cir. 2018) (holding that district court did not err in dismissing Bostock’s complaint for sexual orientation discrimination under Title VII). All three cases involved an employment termination.
6. Bostock v. Clayton Cty., Ga., No. 17-1618 (June 16, 2020).
7. Whittington v. Nordam Group Inc., 429 F.3d 986, 1000 (10th Cir. 2005).
8. Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975).
9. Anderson v. Phillips Petroleum Co., 861 F.2d 631, 637 (10th Cir. 1988).
10. Davoll v. Webb, 194 F.3d 1116, 1143 n.19 (10th Cir. 1999).
11. Abuan v. Level 3 Commc’ns, Inc., 353 F.3d 1158, 1176 (10th Cir. 2003).
12. Thornton v. Kaplan, 961 F.Supp. 1433, 1436 (D.Colo. 1996).
13. Davoll, 194 F.3d at 1144.
14. US Bureau of Labor Statistics, Economic News Release: Employer Costs for Employee Compensation Summary (Mar. 19, 2020).
15. Blim v. W. Elec. Co., 731 F.2d 1473, 1480 (10th Cir. 1984).
16. Hayes v. SkyWest Airlines, Inc., 2018 WL 4561266 at *7 (D.Colo. 2018).
17. Greene v. Safeway Stores, Inc., 210 F.3d 1237, 1245 (10th Cir. 2000).
18. Payton-Huebner v. City of Roswell, 2002 WL 35649508 at *2 (D.N.M. 2002).
19. Thornton, 961 F.Supp. at 1441.
20. Tolan v. Levi Strauss & Co., 867 F.2d 467, 470 (8th Cir. 1989).
21. Fresquez v. BNSF Ry. Co., 2019 WL 5694243 at *12 (D.Colo. 2019).
22. Carter v. Sedgwick Cty., 929 F.2d 1501, 1505 (10th Cir. 1991).
23. Payton-Huebner, 2002 WL 35649508 at *3.
24. Hayes, 2018 WL 4561266 at *8.
25. Davoll, 194 F.3d at 1144.
26. Thornton, 961 F.Supp. at 1436.
27. Equal Emp’t Opportunity Comm’n v. Sandia Corp., 639 F.2d 600, 627 (10th Cir. 1980).
28. Leidel v. Ameripride Servs., Inc., 276 F.Supp.2d 1138, 1142 (D.Kan. 2003).
29. Equal Emp’t Opportunity Comm’n v. RadioShack Corp., 2012 WL 6090283 at *4 (D.Colo. 2012).
30. Ford Motor Co. v. Equal Emp’t Opportunity Comm’n, 458 U.S. 219, 231 (1982).
31. Whatley v. Skaggs Cos., Inc., 707 F.2d 1129, 1138 (10th Cir. 1983).
32. Spulak v. K Mart Corp., 894 F.2d 1150, 1158 (10th Cir. 1990).
33. Sandia Corp., 639 F.2d at 627.
34. Greenway v. Buffalo Hilton Hotel, 143 F.3d 47, 53-54 (2d Cir. 1998).
35. Hayes, 2018 WL 4561266 at *5.
36. Sandia Corp., 639 F.2d at 624.
37. Id. at 625.
38. Whatley, 707 F.2d at 1138.
39. Sandia Corp., 639 F.2d at 626.
40. Equal Emp’t Opportunity Comm’n v. Wyo. Ret. Sys., 771 F.2d 1425, 1431 (10th Cir. 1985).
41. Wise v. Olan Mills Inc. of Texas, 495 F.Supp. 257, 260 (D.Colo. 1980).
43. Ross v. Unified Sch. Dist. No. 231, Johnson Cty., Kan., 1993 WL 62442 at *9 (D.Kan. 1993).
44. Davoll, 194 F.3d at 1144.
45. Buonanno v. AT&T Broadband, LLC, 313 F.Supp.2d 1069, 1083 (D.Colo. 2004).
46. Fitzgerald v. Sirloin Stockade, Inc., 624 F.2d 945, 956 (10th Cir. 1980).
47. Kolb v. Goldring, Inc., 694 F.2d 869, 873 (1st Cir. 1982).
48. Davoll, 194 F.3d at 1144.
49. Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 537 (1983) (citing Chesapeake & Ohio R. Co. v. Kelly, 241 U.S. 485, 491 (1916)).
50. Hayes, 2018 WL 4561266 at *8.
52. The Second Circuit endorsed the use of a net discount rate of 2% in Buckley v. Reynolds Metals Co., 690 F.Supp. 211, 219 (S.D.N.Y. 1988).
53. Thornton, 961 F.Supp. at 1436.
54. Hull by Hull v. United States, 971 F.2d 1466, 1511-12 (10th Cir. 1992).
55. Fitzgerald, 624 F.2d at 956.
56. Greene, 210 F.3d at 1247. It may be that prejudgment interest and liquidated damages are not simultaneously available in ADEA cases, as in Fair Labor Standards Act cases, but it seems clear that prejudgment interest is available in ADEA cases in the absence of liquidated damages. See Blim v. W. Elec. Co., Inc., 731 F.2d at 1479.
57. Equal Emp’t Opportunity Comm’n v. W. Trading Co., Inc., 291 F.R.D. 615, 621 (D.Colo. 2013).
58. Greene, 210 F.3d at 1247.
59. Reed v. Mineta, 438 F.3d 1063, 1066–67 (10th Cir. 2006).
60. W. Trading Co., Inc., 291 F.R.D. at 621.
62. Reed, 438 F.3d at 1067.
63. United States v. Burke, 504 U.S. 229 (1992).
64. Equal Emp’t Opportunity Comm’n v. Beverage Distribs. Co., 780 F.3d 1018, 1023 (10th Cir. 2015).
65. Id. at 1024.
66. Sears v. Atchison, Topeka & Santa Fe Ry., Co., 749 F.2d 1451, 1456 (10th Cir. 1984).
67. Eshelman v. Agere Sys., Inc., 554 F.3d 426, 441 (3d Cir. 2009).
68. Equal Emp’t Opportunity Comm’n v. N. Star Hospitality, Inc., 777 F.3d 898, 904 (7th Cir. 2015).
69. Beverage Distribs. Co., 780 F.3d at 1024.
70. Smothers v. Solvay Chems., Inc., 2014 WL 12665809 at *7 (D.Wyo. 2014).
In the Tenth Circuit, the defendant must prove both the existence of suitable alternative positions and that the plaintiff did not use reasonable care and diligence seeking them. This is different than several other federal circuits, where it is now no longer necessary to provide evidence of suitable alternative positions when the plaintiff has not used reasonable, diligent efforts to search for them.