Earning capacity loss is usually calculated as the difference between earnings absent the incident and actual earnings (with-incident). Valuations are usually divided into past earning losses (where we estimate possible earnings and compare them to known actual earnings) and future earning losses, where we must forecast both with- and no-incident earnings.
Earning capacity losses may include the value of (1) wages, commissions, tips, and net business earnings, (2) pensions, (3) statutory benefits, such as unemployment insurance, and (4) other employee benefits provided by the employer as a condition of employment.
Estimates of earning capacity losses can be based on
- projection of established earning rates, work hours, and possible promotion opportunities as in the case of members of the military,
- statistical average earning data, based on the individual’s age, sex, province, and possibly education,
- statistical average earning data based the individual’s age, sex, and occupation classification, or
- any combination of the above.
Past Earning Loss Valuations
Calculation of past earning capacity losses often requires less speculation than calculations of future earning capacity losses since the individual’s actual earnings may be known and no allowance need be made for mortality or discounting. The services of Discovery, while not essential, may still be helpful and cost-effective in researching and calculating allowances for shift work, employment benefits, wage inflation, and so forth.
Present Value Factors
In circumstances where earning losses are clear, a standard presentation of factors used to calculate the present discounted value of future dollar amounts of earnings or earning losses, including an allowance for the possibility of death in any given year, may be sufficient. Discovery Economic Consulting can provide this type of letter, including a sample calculation which can be based on future annual earning loss estimates provided by the client, for a low fee within 24 hours.
These factors reflect a 2.5 percent annual discount rate as prescribed by the Law and Equity Act and are adjusted for the probability of mortality (according to sex and age) using Statistics Canada Life Tables.
Other Future Earning Loss Valuations
Medical/vocational evidence about the nature of the continuing disability after the trial and about the individual’s options for alternate careers is of particular importance in projecting future earning capacity losses. Once such evidence has been established, estimates of the present value of future earning capacity losses can be developed.
Estimates of future earning capacity losses can be developed in similar manner as a past wage loss calculation using known wage and benefit information for both with- and no-incident scenarios.
Alternatively, data tabulations released by Statistics Canada have permitted the development of much more detailed information regarding the possible career earnings, unemployment, and participation rates of individuals. Coordination of this data with specific medical/vocational evidence for a given case allows for the calculation of the impact a continuing disability is likely to have on an individual’s future earnings.
A major consideration which the Courts have included in arriving at earning loss awards relates to positive and negative contingencies. There appears to be some asymmetry in the Court’s treatment of contingencies that positive contingencies (e.g., possible promotion or other advancement, outstanding business success, working beyond the normal retirement age of 65) are often not requested of economic consultants or are given limited weight while negative contingencies (e.g., reductions for possible unemployment, mortality, non-participation in the labour force) frequently become contested economic issues.
The Courts have sometimes elected to reduce future awards by 20 percent for negative contingencies. This global allowance is intended as a speculative allowance for the various factors which could possibly reduce (or eliminate) an individual’s future earnings.
Previous research and calculations suggest that a smaller reduction may be more appropriate, even if not considering such positive contingencies as unusual promotion or business success. In addition, it should be noted that if 20 percent is used as a contingency allowance, present value factors which do not include mortality may well be appropriate if mortality is included in the 20 percent allowance.
Alternatively, if the evidence shows that the injured party has a strong attachment to their work or career and likely would not have left the labour force or worked part-time except for involuntary reasons such as unemployment or disability, then we would develop factors that assumed that they would have continued to work until a specific retirement date.
Discovery has accomplished a great deal using various data sources in an attempt to quantify the impact of negative contingencies to arrive at a reasonable reduction for these possible occurrences.
The value of employment benefits must not be omitted. Such values can include costs of statutory benefits (Canada Pension Plan, Unemployment Insurance, and Workers’ Compensation coverage) medical/dental plans, group life insurance, disability insurance and future pension entitlements.
Discovery has experience in providing the Court with information regarding the approximate costs for other benefits based on information on whether the individual worked or will work in a office or non-office setting where other benefits are know or not known to exist.
The calculation of estimated lost future pension entitlements can be complicated. For example, in cases where an employee has been required to take early retirement as a result of an injury, disability or wrongful dismissal, the Court may make allowances for the decrease value of the pension caused by that early retirement by simply estimating the loss of contributions made by the employer to the pension plan. In some cases, however, the present discounted value of the pension plan should be estimated. The most likely application of this type of valuation is when an individual has suffered a loss of promotion or a demotion near retirement. (For further discussion on Pension Valuations, please click on “Pensions”.)
The Court will always be reluctant to make allowances for possible future earning losses if the issues surrounding these losses are not clear and well substantiated. Many decisions regarding future earning losses include acknowledgements of uncertainty and the speculative nature of the final award. Thus, the onus of the proof clearly resides with the plaintiff, and economic evidence for the defence often involves no more than development of contingencies or casting doubt upon the case built by the plaintiff’s economic testimony.
It should also be stressed that legislative acts, judicial decisions and releases of new socio-economic data can result in rapid changes in the information contained in these materials. At Discovery Economic Consulting we are aware of new developments in the area and will keep our clients informed.
Some of the basic information we will required to develop earning loss estimates includes the following:
- Client’s date of birth
- Date of trial or valuation (Mediation or Arbitration date).
- Date of accident.
- Education level.
- Summary of past income (income tax returns, income statements, etc.).
- Information related to future medical and earning prospects both in the absence of the accident and as a result of the accident.
EARNINGS OF FEMALES
A British Columbia Supreme Court judgement of April 25, 1991 (Tucker vs. Asleson et al., B871616, Vancouver Registry) appears to cast some doubt on the current practice of estimating future earnings using statistical data that is specific to the sex of the injured individual. In this instance Mr. Justice Finch found that estimates of the potential earnings of a young girl with no earnings history should be based on earnings data for males rather than females. This had the effect of greatly increasing the estimate of the lost “capacity” to earn income.
Although the judge then went on to reduce the award by an unusually large amount (60 to 65 percent) to reflect the high probability that the plaintiff would not achieve the high level of earnings typical of males, it appears that some evolution of the law in this area is possible and that it may be worthwhile, in cases where average earnings data for females is relied on, also to provide estimates that incorporate average male earning experience.
This can be accomplished by providing comparable earnings figures for males of the same education class, or alternatively an average of all earnings for a given education classification regardless of sex. Discovery Economic Consulting can provide these estimates.
Experience of the contingencies of labour force participation and unemployment also vary greatly between the sexes, with women generally having distinctly more unfavourable experience. Again, we are able to provide estimates of the impact of employment contingencies for females, for males, or for a pooled group of both sexes.
EARNINGS DURING “LOST YEARS”
In Semenoff vs. Kokan (September 16, 1991; CA011882, Vancouver Registry) the Court of Appeal reminds us that where an individual suffers an injury that will deprive her of some years of life expectancy, the Court may make an award to compensate for lost income during those years, but will require “living expenses”, defined as the amount the plaintiff would have been likely to spend on herself during the lost years, to be deducted.
Dr. Geoffrey Young, the principle economist for Discovery Economic Consulting has discussed the issues surrounding a “Lost Years” calculation in the Advocate, Volume 53 Part 5, September 1995. In summary, it was suggested that such issues were more complex than indicated by the recent treatment by the Courts and that data and technology can be developed to specifically address those concerns.