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How To Calculate Fringe Benefits

Published July 19, 2023

When an employer hires an employee, salary or hourly wages are often only a portion of the employee’s total compensation package. The rest of the compensation package usually includes additional forms of compensation known as fringe benefits or employee benefits. Since fringe benefits make up a significant portion of many compensation packages, expert forensics must consider them when determining damages for cases related to personal injury, wrongful termination, discrimination, etc.

At The Knowles Group, we work with attorneys and litigation firms nationwide to provide forensic economic consulting services in various legal cases. Economic damage calculations and expert witness testimony is critical to achieving desired outcomes in settlements and trial verdicts involving damage calculations like lost fringe benefits. Contact us today to schedule a complimentary case evaluation if you’re a plaintiff or defendant in a case involving fringe benefit calculations.

What Are Fringe Benefits?

Fringe benefits, also known as employee benefits, are an integral part of an employee’s total compensation package provided by an employer to an employee outside the standard salary or hourly wage. From a legal perspective, fringe benefits compensate employees beyond their regular wages. These additional forms of compensation can be required by law, such as employer contributions to Social Security or unemployment insurance, or they can be voluntary benefits provided by the employer, like health insurance, retirement plans, and education assistance.

Types of Fringe Benefits

Fringe benefits can take on many forms. However, the specific benefits offered vary depending on the company, industry, position, and the employee’s seniority within an organization. Typically, larger companies provide more fringe benefits, while smaller companies provide less. Here are some examples of the fringe benefits an employee could receive from their employer:

  • Health Insurance: Coverage for medical, dental, and vision care, as well as prescription drugs.
  • Retirement Benefits: These may include employer contributions to a 401(k) plan, pensions, or other retirement plans.
  • Life Insurance: Policies that pay out in case of the employee’s death.
  • Disability Insurance: Coverage that provides employees with income if they cannot work due to a disability.
  • Education Assistance: Reimbursement for tuition, fees, and other education-related expenses, for either the employee or their children.
  • Childcare Assistance: Subsidies or access to childcare facilities.
  • Commuting Assistance: This might include free or discounted public transit passes, parking allowances, or even company cars for certain positions.
  • Housing Assistance: Some companies, particularly those in high-cost areas, offer housing subsidies or company-owned housing.
  • Meal Plans and Food Services: Free or discounted meals at company cafeterias or food delivery services.
  • Wellness Programs: Subsidies for gym memberships, health coaching, mental health programs, etc.
  • Paid Time Off: In addition to standard vacation days, this could also include sick days, personal days, or even sabbaticals for long-term employees.
  • Flexible Working Hours: Although not a direct financial benefit, flexibility in work schedules is a highly valued benefit by many employees.
  • Employee Discounts: Reduced prices on the company’s products or services.
  • Stock Options and Equity: Some companies offer employees a stake in the company through stock options or equity awards.
  • Relocation Expenses: The company might pay for some or all relocation costs if a job requires moving.
  • Professional Development: The company might pay for seminars, training, professional memberships, or other career development activities.

How Much Does the Average American Employee Earn In Fringe Benefits?

According to a survey completed by the U.S. Bureau of Labor Statistics in 2018, the average annual fringe benefit cost of a single employee was $21,276 and accounted for 30.2% of employer costs. Further data collected by the U.S. Bureau of Labor Statistics in 2023 found that benefit compensation for civilian workers costs $13.36 per hour, accounting for 31% of employer costs. For private industry workers, benefit costs totaled an average of $12.02 per hour, accounting for 29.4% of employer costs, while benefits for state and local government workers cost an average of $22.19 per hour, accounting for 38.2% of employer costs.

As you can see, this data shows that fringe benefits are a significant portion of any employee’s annual compensation package, which is why accurate fringe benefit damage calculations are critical during any settlement litigation.

Is There A Formula for Calculating Fringe Benefits?

Calculating lost fringe benefits is complex and requires the consideration of many influencing factors. Therefore, more than a simplified formula is needed to produce accurate damage figures. However, an example of a simplified formula could be as follows

Lost Fringe Benefits = (Annual lost wages x fringe benefit percentage) x work-life expectancy

Typically, expert forensics obtain the fringe benefit percentage from the last work year of the employee and apply that percentage to all future years. For example, if the fringe benefit percentage were 30%, then future lost fringe benefits would be estimated as 30% percent of the annual lost wages for every year remaining in the plaintiff’s working life.

Hypothetical Example

A 35-year-old software engineer, Alex, was wrongfully terminated from a tech company in San Francisco, California. Alex earned an annual salary of $120,000 at the time of termination. Additionally, Alex received fringe benefits worth about 30% of his salary, including health insurance, retirement contributions, dental insurance, etc.

Factors That Influence Fringe Benefit Calculations

To accurately calculate fringe benefits, an expert forensic must consider several influencing factors, including

  • Employee earnings
  • Employment duration
  • Demographic Factors
  • Worklife expectancy
  • Union trades
  • Economic climate
  • Geographic location

Employee Earnings

An employee’s earnings play a significant role in calculating the value of certain fringe benefits, particularly retirement plans and life insurance policies, which are often a percentage of the employee’s salary.

Based on Alex’s annual earnings of $120,000, and fringe benefits totaling 30% of this salary, it’s determined that Alex was earning $36,000 per year in fringe benefits.

Employment Duration

The length of the employment period is crucial in determining the accumulation of specific benefits, such as retirement funds and paid time off.

Alex had been with the company for ten years before termination and had an excellent performance record justifying the yearly fringe benefits total.

Demographic Factors

Demographic factors, such as age, health status, marital status, and number of dependents, can all play a role in the utilization and cost of specific benefits, like health insurance.

Alex’s age, profession, and health all suggest a high likelihood of continuous employment until age 65.

Worklife Expectancy

Work-life expectancy refers to the estimated number of years an individual will remain active in the workforce.

Given Alex’s age, education, and occupation, and considering national average labor statistics, it’s estimated that Alex had a work-life expectancy of another 30 years.

Economic Climate

Macroeconomic conditions like inflation and interest rates can affect the value of certain fringe benefits.

The tech industry has been growing steadily, with an annual wage growth rate of 5%. This yearly wage growth is used in the lost fringe benefit calculations.

Geographical Location

The location can affect the cost of living adjustments and may also impact certain benefits like commuting allowances or housing assistance.

Given that San Francisco is a major tech hub, it’s taken into consideration that Alex’s salary and benefits were higher than the national average for similar positions.

The Role of Discounting When Calculating Fringe Benefits

Discounting is a fundamental concept used to calculate the present value of future earnings. It’s based on the underlying principle that a dollar today is worth more than a dollar in the future due to factors such as inflation. Discounting allows for translating future losses into a present value equivalent in the context of fringe benefit damage calculations.

Discounting plays two roles in damage calculations. First, it establishes the discount rate—a factor that reduces future amounts to their present value. The selection of an appropriate discount rate can significantly impact the calculation outcome. Second, depending on the jurisdiction, the law may stipulate specific methods or rates for discounting. Therefore, expert forensics must know these legal requirements to provide accurate, legally sound, and equitable damage calculations.

Accurate Fringe Benefit Calculations Often Require The Assistance of an Expert Forensic Economist

Fringe benefits make up a considerable percentage of any settlement value and must be calculated accurately if a fair resolution is to be reached. Since 1979, The Knowles Group has provided thousands of attorneys and their clients across North America with the highest quality economic damage calculations and expert witness testimony.

If you represent a plaintiff or defendant in a legal case involving fringe benefit damages, contact us today to schedule a complimentary case consultation to learn how our services can improve the outcome of your case.

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.