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Calculating Lost Wages

Published May 3, 2022

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

What are lost wages?

Lost wages refer to the compensation a claimant fails to receive when they are unable to work due to the subject incident. In many legal cases, the plaintiff is entitled to pursue income lost due to their injuries and work hours missed due to medical treatment. 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. Lost wages are paid in addition to money spent on other damages such as medical expenses. Their payment is the responsibility of the defendant and/or their insurance company.

Is there a formula for calculating lost wages?

The formula used to calculate lost wages is uncomplicated with the use of plaintiff’s annual level of pre-incident earnings and the length of time they will be unable to work. If the claimant has lost a significant amount of time, 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 work are more complex. It’s best to work with a personal injury lawyer and expert forensic economist to determine just and accurate calculations.

A hypothetical case

Mike is a salesman for a medical sales company. His employer pays him a base-salary plus regular bonuses based on his sales numbers each year. 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 the right to $163,880.39 in lost wages. Let’s take a look at how each lost wage factor will contribute to the demands of Mike’s personal injury settlement.

What factors are considered when determining lost wages?

When determining the total lost wages, the plaintiff’s legal team considers a range of factors. 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 documentation proving lost income will be provided as evidence. These documents include income tax returns, payroll records, L&I records, medical records, a doctor’s note, and more.

Regular wages (hourly or salary)

Regular wages include the amount of time missed due to the plaintiff’s claim. This includes hourly and salaried employees. Hourly wages are calculated by multiplying the total hours missed by the hourly wage. For salaried employees, the amount of time missed at work is multiplied by the estimated salary level.

In Mike’s circumstance, he’s paid a base salary of $70,000 per year. 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, overtime is considered an opportunity, not an entitlement. This means overtime isn’t always factored into a lost wages claim. However, if a plaintiff consistently works overtime hours and has the pay stubs to prove it, their lawyer will certainly argue their inclusion.

Because Mike is a salaried employee and rarely works overtime hours, no overtime pay will be factored into his settlement demands.

Bonus pay

Bonus payments may also be factored into a lost wages claim. It will be the plaintiff’s responsibility to prove their right to bonus pay by proving that bonuses are an “integral part” of their compensation. They will need to provide documentation of past bonuses or a report from their employer detailing how bonuses are included in their 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 as a result of losing time at work. The plaintiff may have out-of-pocket medical expenses or out-of-pocket health insurance premiums.  These factors need to be included 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 they’re properly documented. If a perk such as a company phone or vehicle is lost due to an extended absence, 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 individuals who are self-employed, lost wage calculations are more complicated. The plaintiff must have been in business for a reasonable period of time. New businesses prove problematic. The plaintiff will find it difficult to collect lost wages because there’s no documented financial history. This makes any claims of future profits purely speculative and easy to argue against. Whereas 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 or a diminishment of 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 lost income for their victims. These statistics highlight the staggering amount of money paid in personal injury and accident claims each year. During the litigation of a car accident claim, accurate representations of economic damages and expert witness testimony will greatly strengthen either sides’ case.

Legal cases that require lost wage calculations

Any legal case that results in a plaintiff losing their ability to produce income will require lost wage calculations. This can include personal injury & accident claims, medical malpractice claims, employment claims, and other areas of practice.

Other factors to consider

The nuance and detail of the legal claim process creates a multitude of factors to consider. In regard to lost wages, factors such as lost earning capacity or lost earning potential, fringe benefits, collateral source, and so many more need to be considered in building the strongest case possible. This is why it’s essential to work with skilled experts who understand the economic implications and are able to determine the full scope of damages and economic loss. As one of the top economic consulting firms in the United States, The Knowles Group have determined calculations and provided expert testimony in multiple states and federal courtrooms across the country in a range of legal cases for both 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.