Loss of earning capacity damages are typical damages in a personal injury claim involving severe injury. If an injury affects the claimant’s future career advancement, they may seek loss of earning capacity damages. Due to the speculative nature of a lost earning capacity claim, the plaintiff must prove the value of the damages with reasonable certainty in litigation. This burden of proof makes the services of economic experts vital. The Knowles Group works with attorneys and litigation firms nationwide to provide calculations and expert witness testimony for damages such as loss of earning capacity.
What is Loss of Future Earning Capacity?
Lost earning capacity is a general damage category that compensates for the plaintiff’s ability to earn money in the future. Lost earning capacity considers what a plaintiff could have earned had their injury never occurred. A severe injury can drastically impact a claimant’s lifetime earning potential. Severe injuries can alter a career, lessen the worker’s hours to part-time, or cause lost opportunities for pay raises, promotions, and new job offers.
The Difference Between Lost Earning Capacity and Lost Earnings
It’s essential to clarify the distinction between “lost earning capacity” and “lost earnings” in the context of economic damages assessment. Lost earning capacity is the reduction in a person’s ability to receive future earnings over their lifetime due to an injury or wrongful act. The concept is forward-looking and speculative, considering the potential future earnings that the individual could have made if not for the incident. The assessment involves analyzing the individual’s skills, education, experience, and the impact of the injury on their future work life. Factors such as potential promotions, career advancements, and inflation are also considered.
Lost earnings pertain to the actual lost income due to an injury or wrongful act. This is a historical calculation, focusing on the income the individual would have certainly earned had the incident not occurred. Lost earnings are calculated from the time of the incident to the present and include wages, salaries, bonuses, and other forms of compensation that the individual would have received. This calculation is more concrete and is based on the individual’s past earnings history, without speculation about future potential income.
In essence, lost earning capacity estimates the potential future income lost due to the injury or incident. In contrast, lost earnings represent the actual lost income due to the incident.
Formula for Calculating Loss of Earning Capacity
The speculative nature of lost earning capacity damages means they are not measurable in exact dollar figures. The court requires a plaintiff to provide evidence proving the reasonable value of their lost earning capacity.
An economic expert calculates this reasonable value using the claimant’s work-life expectancy, projected future earnings, cost of living, and other data. A vocational expert can then support these assumptions. They will offer professional opinions about the person’s ability to continue their career and other work they may or may not be able to perform.
Loss of Earning Capacity = (Projected Earnings Without Injury – Projected Earnings With Injury) × Work-Life Expectancy
Hypothetical Example of a Lost Earning Capacity Claim
Consider John Doe, a 35-year-old software engineer earning $100,000 annually with a work-life expectancy of 30 more years. As a result of a severe injury, his earning capacity is diminished, and he is now expected to earn $60,000 annually. Inserting the lost annual income of $40,000 into the formula above, the expert forensics hired by John’s personal injury attorney determines that his lost earning capacity due to the injury should permit him to recover past and future lost earnings worth $1,200,000 (nominal dollars).
Factors Involved in Calculating Earning Capacity
An economic expert must consider several influencing factors that affect earning capacity. These considerations include factors such as:
- Profession & Career
- Current wages
- Market value
- Historical career performance
- Skills, Talents, & Abilities
- Education, Licenses, certifications
- Work history
- Location
Profession & Career
Understanding the claimant’s profession and career is essential for lost earning capacity calculations. Each profession has a unique growth curve with specific compensation levels. Additionally, the forensic must consider the projected industry performance over the claimant’s work-life.
Example:
For John, his profession as a software engineer has a high growth curve with significant potential for increased earnings. In his case, the profession and career factor could add 10% to the calculated lost earning capacity, increasing the settlement by $120,000.
Current Wages
Current wages include any actual earnings the claimant was receiving before the accident. These are the same figures used to calculate lost wages, including the plaintiff’s salary and benefits.
Example:
John’s current wages of $100,000 are the baseline for calculating his lost earnings and factor significantly into the lost earning capacity. The $40,000 annual difference in earnings post-injury directly impacts the loss of earning capacity calculation.
Market Value
Forensics must also consider the market value of the profession when calculating lost earning capacity. This includes future income and benefits throughout the plaintiff’s work life. The forensic will determine the market value of the claimant’s career using The Department of Labor’s Bureau of Labor Statistics. Then, a vocational expert can testify to these assumptions.
Example:
The market value of a software engineer like John is expected to increase over time. If the market value is projected to increase by 3% annually, this will factor into an increased settlement amount, potentially adding another $36,000 over the 30-year work-life expectancy.
Historic Career Performance
Evaluating historic career performance is crucial in determining future earnings potential. The expert forensic can use past raises, bonuses, and promotions data to accurately predict future lost earnings.
Example:
If John had a history of receiving a 5% annual raise, this would be factored into the calculation, potentially adding an estimated $150,000 to the lost earning capacity figure over his 30-year work-life expectancy.
Skills, Talents, Abilities
The claimant’s skills, talents, and abilities significantly influence their future earning capacity. The more skills, talent, and abilities a claimant has, the more likely they will have a successful career. That success correlates to a higher potential future earning capacity.
Example:
John’s advanced skills and talents in software engineering increase his potential for higher future earnings. This could add an estimated 5% to the lost earning capacity, equating to an additional $60,000.
Education, Licenses, Certifications
A claimant’s education and professional qualifications also play an essential role. Education, professional training, and opportunities for career growth all share a strong correlation. Therefore, the expert forensic must consider these when calculating lost earning capacity damages.
Example:
John’s advanced degree and certifications in software engineering further enhance his earning capacity. This could add another 5% to the total calculation, equivalent to an additional $60,000.
Work History
The consistency of the claimant’s work history is vital for understanding their future earning potential. Higher levels of consistency correlate to higher earning potential. The number of past jobs, the time gaps between them, and the amount of time in their current position are critical indicators of consistency.
Example:
John’s stable work history, with long tenures at each job, supports a higher future earning capacity, potentially adding another $50,000 to the calculation.
Location
The claimant’s geographical location also plays a significant role in the calculations. If the claimant lives in an urban location with a booming economy, they have a high opportunity cost. Conversely, their exposure to opportunities is much lower if they live in a rural or dying area. On top of that, specific industries perform better in one location compared to another.
Example:
Living in a tech hub like Silicon Valley, John’s location provides him with ample opportunities for career advancement, potentially adding another $100,000 to the lost earning capacity calculation.
Loss of Earning Capacity for a Self-Employed Person
Proving lost earning capacity for a self-employed claimant can be difficult. The primary determining factor is the age and earnings of the claimant’s business. Suppose they provide financial records to prove a history of steady revenues. In that case, a vocational expert can evaluate the claimant’s reduced earning capacity after the injury. With that information, the forensic can calculate lost earning capacity. If the company is new or revenues are inconsistent, proving lost income and loss of earning capacity becomes more complex. However, that does not mean lost earning capacity cannot be proven.
Loss of Earning Capacity for a Person with No Work History
The fact that a plaintiff has no work history doesn’t stop them from claiming lost earning capacity damages. This scenario is common in children and people under the age of 20. Working with a vocational expert, economic experts can survey the labor market to determine the employment opportunities available to the injured claimant. They can compare this data to the claimant’s pre-injury education and career aspirations. This allows them to determine a reasonable figure for loss of earning capacity damages.
Hire a Forensic Economist to Calculate Loss of Earnings Capacity
When determining a reasonable value for loss of earning capacity damages, the services provided by forensic economists and vocational experts are vital. We also provide calculations for workers’ compensation cases. The Knowles Group has provided professional economic services to thousands of attorneys since 1979. We’ve provided expert witness testimony for personal injury cases in multiple state and federal courtrooms across North America for plaintiffs and defendants alike. In addition, we have access to a vast network of professional experts required to determine economic damages, such as reasonable lost earning capacity figures. Contact us today to discuss your case and schedule a free consultation.
