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Calculating Lost Wages

Published December 3, 2023

Lost wages are vital in determining the value of any lawsuit causing lost compensation, such as a personal injury case. Expert forensics must consider a range of variables when calculating lost wages. These variables create complex situations, often requiring the help of forensic economists. The Knowles Group is one of the country’s leading litigation economics consulting firms. Our firm accurately calculates economic damages and provides expert witness testimony for plaintiffs and defendants.

What are lost wages?

Lost wages refer to the compensation a claimant fails to receive when they cannot work due to the subject incident. In personal injury and medical malpractice cases, the plaintiff may have the right to pursue income lost due to injuries and ongoing medical treatment. In wrongful termination suits, the plaintiff may have the right to pursue the earnings they would have earned if not for being wrongfully terminated. The value of the plaintiff’s lost income will consider factors such as regular wage (hourly or salary), potential overtime, lost income opportunities (raises, bonuses, and commissions), health benefits, retirement contributions, and more. When the court awards lost wages, their payment is the responsibility of the defendant or their insurance company in addition to money spent on other damages, such as medical expenses.

Is there a formula for calculating lost wages?

The formula expert forensics use to calculate lost wages is relatively straightforward. Take the plaintiff’s annual pre-incident earnings and multiply it by the period they could not work. Suppose the claimant has lost a significant amount of time. In that case, pre-incident earnings must be adjusted for time (inflation or wage growth). A general formula would be as follows:

Lost wages = (Pre-incident annual earnings) x (Portion of the year(s) missed) + (Additional factors)

However, calculating lost wages becomes more complicated if the plaintiff is self-employed. Likewise, situations resulting in extended periods and indefinite loss of earnings are more complex. For this reason, it is best to work with a personal injury lawyer and expert forensic economist to determine just and accurate calculations.

A hypothetical case involving lost income

Mike is a salesman for a medical sales company. His employer pays him a base salary plus regular bonuses based on yearly sales. One day, while driving home, an inattentive driver ran a red light and hit Mike’s car at speed. The accident was severe, and Mike will miss work for at least a year. So, he hires a personal injury lawyer and files an accident claim against the other driver and their insurance company. His legal team concludes that Mike has an estimated total of $163,880.39 in lost wages and other compensation. Let’s examine how each lost wage factor contributes to Mike’s personal injury claim demands.

What factors are considered when determining lost wages?

The plaintiff’s legal team considers various factors when determining the total lost wages. Yet, not all factors are guaranteed to be honored. An experienced attorney will ensure their demands include any factor that may have caused the client’s income to suffer. Then, they must provide documentation proving the lost income as evidence. These documents include income tax returns, payroll records, L&I records, medical records, doctor’s notes, and more.

Regular wages (hourly or salary)

Regular wages include the time missed due to the plaintiff’s claim. These regular wage figures apply to hourly and salaried employees. One calculates hourly wages by multiplying the total hours missed by the hourly wage. For salaried employees, one multiplies the time missed by the plaintiff’s yearly salary.

In Mike’s circumstance, he’s paid a base salary of $70,000 annually. He won’t be able to work for at least a year, so his lawyer includes 18 months of regular wages in their demands.

 Mike’s Total Lost Regular Wages = ($70,000) x (year x 1.5 years) = $105,403.84 Lost Regular Wages

Overtime compensation

Overtime compensation includes any extra hours outside the plaintiff’s regular working hours. In legal settlements, the court considers overtime an opportunity, not an entitlement, meaning an expert forensic will only factor overtime hours into lost wage calculations if a plaintiff consistently works overtime hours and has the pay stubs to prove it.

Because Mike is a salaried employee and rarely works overtime hours, his lawyer does not argue for overtime pay in his settlement demands.

Bonus pay

An expert forensic may also factor bonus payments into a lost wages claim. The plaintiff will be responsible for proving their right to bonus pay by proving that bonuses are an “integral part” of their compensation. They must provide documentation of past bonuses or a report from their employer detailing how they include bonuses in the compensation plan.

Mike has been working with his company for the past ten years. He’s paid a yearly bonus based on his total sales for that year. An average of his past bonus payments multiplied by a year and a half will determine his lost bonus pay. One has to consider that the bonuses may have been declining or increasing in the recent past.

Mike’s Total Lost Bonus Pay = $222,557 total bonus pay received ÷ 10 years = $22,257 average yearly bonus x 1.5 years of missed work = $33,386.55 lost bonus pay

Healthcare, 401k, and benefits

During time away from work, the plaintiff may miss contributions to a 401k or similar retirement plan. They may also lose their healthcare offering from their employer due to losing time at work. The plaintiff may have out-of-pocket medical expenses or out-of-pocket health insurance premiums. An expert forensic must factor these contributions in the final calculations of lost wages.

Mike’s employer matches his 15% 401k contribution. Therefore, his lawyer includes the employer’s contribution into his settlement demands.

Mike’s lost 401k  = ($70,000 x 15%) =$10,500 lost contributions

Other company perks

Other perks, such as a company phone, vehicle, gym membership, etc., are also included, provided proper documentation. Suppose a plaintiff loses perks such as a company phone or vehicle due to an extended absence. In that case, the plaintiff can claim any additional expenses incurred.

Mike’s employer provided a company car while he was working. After the accident, the car was totaled. Since he didn’t return to work, the company did not provide a new car. He had to buy a used car instead.

Mike’s used car cost = $10,250

What if you’re self-employed?

For self-employed individuals, lost wage calculations are more complicated. The plaintiff must have been in business for a reasonable period. New businesses prove problematic. The plaintiff will find it challenging to collect lost wages because there’s no documented financial history, making any claims of future profits purely speculative and easy to argue against. In contrast, established businesses will have the records necessary to claim lost wages.

The Knowles Group calculates business damages using Schedule C or 1120S returns and other business records to project future income. We then consider these projections in proving lost income and future lost earning capacity.

Determining lost wages after a car accident

According to the U.S. Department of Justice, over half (52%) of all personal injury cases result from a car accident. Over six million accidents occur throughout the country each year. These car accidents cause over $200 billion in damages. Many of these accidents result in injuries that lead to significant loss of income for their victims. These statistics highlight the staggering amount paid in annual personal injury case and accident claims. Accurate representations of economic damages and expert witness testimony will significantly strengthen either side’s case during the litigation of a car accident claim.

Legal cases that require lost wage calculations

Any legal case resulting in a plaintiff losing their ability to produce income will require lost wage calculations, including personal injury case and accident claims, medical malpractice claims, dental malpractice, employment claims, and other practice areas.

Contact us for economic damage calculations and expert witness testimony for your lost wages claim

The nuance and detail of the legal claim process create many factors to consider. When it comes to lost wages, plaintiffs and defendants must consider factors such as lost earning capacity or lost earning potential, fringe benefits, collateral sources, and more to build the most robust case possible. This range of factors makes working with a skilled economic expert who understands the implications and can determine the full scope of damages and financial loss.

As one of the top economic consulting firms in the United States, The Knowles Group has determined calculations and provided expert testimony in multiple states and federal courtrooms nationwide in various legal cases for plaintiffs and defendants.

Eric Knowles, MBA

The Knowles Group has been providing professional economic services to the legal community since 1979. The firm has worked on behalf of thousands of attorneys in a dozen states and Canada. Testimony has been provided in both federal and state venues.