The Neighborhood’s Going to Hell! So Sue Your Neighbors For Destroying the Value of Your House!

House in Trouble 1Some people have the greatest neighbors. Not everybody. When your neighbor is a manufacturing plant, a fracking operation, or a poorly managed dog kennel, you may have a legal claim for nuisance, trespass, waste, or  other claims. You may have a right to sue for damages — but how much?  How do we determine the diminished value of your home?

Real estate appraisers commonly apply three general approaches to valuing real estate: (1) the sales comparison approach; (2) the cost approach; and (3) the income capitalization approach. Each of these approaches can be modified to explore the amount of damages suffered in a real estate case.

The sales comparison approach essentially compares a particular property with comparable properties that have recently been sold to establish a property value. Applying the principle of substitution, this approach assumes that a buyer would not purchase a property for any price greater than what he would pay for a comparable property, consisting of similar features and characteristics, and presumably sold in the same locale under similar market conditions.

When a legal dispute arises and the value of a certain property has been thereby diminished, the sales comparison approach can be utilized to determine the monetary damage affecting the subject property. The specific method is known as matched pair analysis or paired sales analysis.

Let’s assume, for example, that a homeowner claims that his home has been devalued by a manufacturing plant that has recently expanded its operations onto a bordering tract of land, causing loud machinery noises and malodorous air pollution. His home is described as a two-story Colonial, with four bedrooms, two-and-a-half baths, a two-car garage, and a large backyard sitting on one-half acre in a suburban residential tract.

House in Trouble 2Using the matched pair analysis, the subject home would be compared to one or more similar homes located elsewhere in the community that are not affected by the deafening machines or the foul-smelling air quality. The comparable homes should be two-story Colonials with four bedrooms, two-and-a-half baths, and other similar characteristics. If the match between the subject home and the comparable home is accurate, then the difference in the sales prices should reflect the value of the damages attributable to the nuisance caused by the abutting manufacturing plant.

Assume then the subject property has sold (or can be sold) for $300,000. Three similar properties not affected by the noise or the pollution (Comp1, Comp 2 and Comp 3) have sold for higher amounts. The damage suffered by the subject property owner would be an averaged difference between the sales price for the subject home and the sales price of each of the comparable homes, as shown below.

Comparable               Sales                        Difference ($$)                Difference (%) Properties                   Price                        from Subject                      from Subject 

SUBJECT                   $300,000

COMP 1                      $412,000                       $112,000                                       27.18%

 COMP 2                      $368,000                       $68,000                                      18.48%

 COMP 3                      $379,000                       $79,000                                       20.84%

 Average of Comps    $386,333                        $86,333                                        22.35%



 As the table depicts, the three comparable homes, unaffected by the adverse conditions, drew higher sales prices than the subject property. The average price of a comparable home was $386,333, which was $86,333 more than the sale price of the subject property. This represented a difference (a loss in sales value) of more than 22%.

Attorneys who used a matched pair analysis must be prepared to defend against two common attacks on this approach. The first attack is that the homes chosen for the comparison are not comparable. Challengers will frequently argue that the homes selected as being comparable homes are, in fact, differentiated by some feature or amenity. While the “comps” may all be two-story Colonials, two-and-a-half baths, and two-car garages, other distinctions may render the match invalid.

Suburban TractFor example, one of the comps may have stand-alone, window-based air-conditioning units instead of central air-conditioning. Another comp may have a swimming pool or a fully built basement. If this is the case, it may be necessary to adjust the figures to account for the differences. Therefore, if a comparable home with a swimming pool sold for a greater amount partly because of the swimming pool, then the value which the swimming pool added to the sales price used to make the comparison.

 An abbreviated way to depict the matched pair approach, with such an adjustment, is:

            Damages = 

             Sales Price of Comp Home

                      – Adjustment (Swimming Pool Value)

                     – Sales Price of Subject Home

 If a comparable property with a value-adding swimming pool sold for $400,000, of which $10,000 could be attributed to the swimming pool, and if the subject property could draw only a $300,000 purchase price, then the dollar value of the damages suffered by the subject homeowner would be:

             $400,000 – $10,000 – $300,000 = $90,000

 A loss of $90,000 off the price tag would represent a 22.5% reduction.

 The second common attack on the matched pair analysis is the proximate cause argument. Challengers are likely to assert that the differences in price between a subject property and comparable property are not attributable exclusively to the event or the circumstances on which the legal action is based. If the case is based on a civil tort claim for damages based on nuisance theories attributable to noise and air pollution, the defendants may argue that other factors – market conditions, age of the properties, or specific transactional conditions – account for the difference in the sales price. The defense would contend that the industrial operations at the nearby plant are not the proximate cause (or the exclusive cause) of the difference in the market values of the subject property and comparable homes elsewhere in the community.

Expert testimony may provide the necessary evidence to prove causation and damages. Yet perhaps the parties can settle the claim before trial by agreeing that the defendant is responsible for a certain percentage of the diminution in value of the subject property. If the defendant concedes 60% responsibility, then the formula shown above can be modified as follows:

           Damages =

            Sales Price of Comp Home

                – Adjustment (Swimming Pool Value) 

                – Sales Price of Subject Home

            Multiplied by percent of responsibility

Using the figures above, we’ll apply 60% as the percent of responsibility:

             $400,000 – $10,000 – $300,000 =$90,000

            $90,000 x 0.60 = $54,000

The defendant would then be obligated to pay $54,000 in damages, assuming that the cause of action was otherwise proven and the matter was amicably settled.

 Appraisers and other technical experts may apply the sales comparison approach using a variety of other, more sophisticated, comparison techniques. These include trend analysis, proximity analysis, and multiple regression analysis which use larger data sets and/or survey research. However, the simplified matched pair analysis discussed above, as modified by the appropriate adjustments, offers a reasonable approach for calculating damages in a real estate case.   Tomorrow:  The Cost Approach.

 

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What’s My Reputation Worth? Fire Me and Find Out.

         shutterstock_420124753Can a victim of employment discrimination recover damages for her blemished reputation? That depends. If framed in terms of lost future earnings, a discharged worker may be able to recover even nonpecuniary losses — those kinds of damages that look more like “pain and suffering” or “loss of goodwill” than loss of front pay.    

          The Civil Rights Act of 1991 added remedial provisions to Title VII which authorize compensatory damages for a plaintiff’s “future pecuniary losses, emotional pain, suffering, inconvenience, mental anguish, loss of enjoyment of life, and other nonpecuniary losses.” Not only did these amendments spring open the door to a variety of pain-and-suffering claims, but they also triggered a new generation of unspecified claims for nonpecuniary damages in employment litigation.

            For example, the Seventh Circuit has recognized the right of a plaintiff to lost future earnings, separate and distinct from her right to front pay. In Williams v Pharmacia, Inc., 137 F. 3d 944 (7th Cir. 1998), the court characterized such lost future earnings as “an intangible nonpecuniary loss” and analogized it to an “injury to professional standing” and an “injury to character and reputation.” Citing the civil rights provisions for nonpecuniary losses, the court distinguished front pay from lost future earnings. It found that front pay compensates the employee for the actual lost earnings from the job, had she been able to return to the job, and measured by the period of time she would have remained working at that job. Lost future earnings, by contrast, compensate the employee for a lifetime of diminished earnings resulting from the reputational harms she suffered as a result of the discrimination she experienced.

shutterstock_185162960   Today, our federal courts widely recognize the fact that a victim of employment discrimination may thus seek to claim damages to her professional standing, injury to her character and reputation, loss of her future earning capacity and damage to her credit standing, all under the rubric of an intangible nonpecuniary loss.See, e.g., U.S. v. Vulcan Society, Inc., 897 F. Supp. 2d 30 (E.D. N.Y. 2012).

             But how do we calculate such a form of lost future earnings?  

            To calculate lost future earnings, pain and suffering, and other nonpecuniary losses, a judge or jury may require additional relevant evidence, not to mention the possible guidance of an economics expert. Formulas used in personal injury and wrongful death litigation may also provide guidance. Yet, because there is no precise mathematical formula for calculating the intangible losses suffered by a victim of employment discrimination, juries are often asked to agree upon reasonable compensation for a victim’s pain and suffering or other nonpecuniary losses.

            The jury’s domain is perhaps sacrosanct, and some may say that no attempt should be made to render the process of assessing such damages more scientific or formulaic. On the other hand, attorneys, arbitrators, judges and jurors who are trying to settle an employment case, or who wish to take the guesswork out of the process of fixing a nonpecuniary loss, may wish to apply a more precise and justifiable approach.

            One such approach is to construct a table of multipliers that would tie a victim’s pain-and-suffering, inconvenience, mental anguish, social isolation, and loss of enjoyment of life to the actual amount of back pay paid or payable in a compensable case. The underlying question asks: what amount, when added to a victim’s back pay, will compensate the victim for his nonpecuniary losses? The formula asks: what number, when multiplied by the total amount of back pay, will produce a dollar amount that fairly and reasonably compensates the victim for his nonpecuniary losses?

            In attempting to find such multipliers, it would seem that the longer the victim remains unemployed or otherwise adversely affected by the challenged employment action, and the greater the amount of his back pay, the larger the multiplier should be to properly compensate him for the nonpecuniary aspect of the case. For example, a sample table of multipliers might look like this:

Back Pay                                            Multiplier                            Nonpecuniary Damages

$0 to $25,000                                      0.33                                         $0 to $8,250

$25,001 to $100,000                           0.5                                           $12,500 to $50,000

$100,001 to $500,000                         0.75                                         $75,000 to $375,000

$500,001 to $1,000,000                      0.875                                       $437,500 to $875,000

$100,000,001 an above                       1.0                                           $1,000,001 and above

            Using this sample table, we would apply a multiplier of 0.33 to a back pay award of $25,000 to produce an additional award of $8,250 to compensate the victim for pain and suffering, reputational injury, mental anguish, and related nonpecuniary damages. A victim who remained out of work for a much longer time period, or who experienced a much greater financial loss attributable to job discrimination, and who would thereby be entitled to a back pay award of $400,000, would be entitled to an additional (nonpecuniary) award of $300,000, using the hypothetical 0.75 multiplier shown above.

            A table of multipliers could also be applied to psychological costs where pain-and-suffering from loss of employment is a significant part of the claim. Thus, for example, an employee who files suit for sexual harassment and is forced to leave the workplace to avoid a clearly hostile work environment would be entitled to her Title VII damages for back pay and front pay, as well as some unspecified quantum of compensation for her emotional grief, anxiety, shock, and the disruption in her life.

            Assuming that the emotional and nonpecuniary damages were significant enough to require the victim to enlist the help of a psychologist, the evidence will likely include the cost of psychological therapy as a specific item of damages. That cost could then be augmented, by a multiplier, to cover the value of the victim’s pain-and-suffering and related nonpecuniary claims. Consider, for example, a variation of the table of multiplier, this time based on therapy costs:

Therapy Costs                                   Multiplier                          Nonpecuniary Damages

$0 to $5,000                                        1.0                                           $0 to $5,000

$5,000 to $10,000                               1.5                                           $7,500 to $15,000

$10,001 to $50,000                             2.0                                           $20,000 to $100,000

$50,001 and above                              2.5                                           $125,000 and above

            In this scenario, a victim who incurs $10,000 in psychotherapy costs as a result of her isolation, displacement, and mixed emotional problems following her sexual harassment in the workplace would be entitled to reimbursement of her therapy costs plus an additional $15,000 as nonpecuniary damages to cover her pain and suffering.

 

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Fired but Not Forgotten: How To Calculate Back Pay.

       shutterstock_396811075 Fired!  Aha, but not forgotten!  You intend to collect all of the “back pay” that is rightfully yours.

          Back pay is the amount of compensation that would have been paid to the employee had she not been wrongfully terminated from employment – up to the point that front pay is calculated. In effect, back pay runs from the last paycheck the employee received after being discharged until the point at which future wage loss is calculated. Or, stated otherwise, back pay consists of all wage loss from the moment of termination until the moment that a court enters a judgment in favor of the employee for being wrongfully terminated from employment.

 

            Back pay also necessarily includes salary increases, bonuses, and other pay enhancements that the employee would have received had she not been terminated. It includes fringe benefits such as profits from employer stock options that the employee could have exercised during the period between termination and judgment. Like front pay, however, the amount of back pay must be reduced by the actual amount of earnings received by the employee through other employment opportunities, including any amounts that could be imputed to her as payments she could have claimed to mitigate her losses.

Determining Base Salary

            The time between discharge from employment and a trial on a wrongful termination claim can be lengthy. In a state in which there is a two-year statute of limitations to bring such claims, and in which the backlog for a trial runs three years, a judgment for back pay could come five years from the last day of employment. Thus, the first step is to determine the amount of earnings at the time of termination and the amount of time that has elapsed until the time of trial.

        shutterstock_428751676    It may be easiest, in fact, to state the amount of monthly or weekly earnings rather than yearly earnings in order to simplify the math. For example, if a discharged manager was earning $85,000 per year, and if the time between discharge and trial was 2 years, 11 months, and 1 week, it may be easiest to reduce his annual earnings to a time period that matches the most specific measure of time between discharge and trial – that is, to a weekly basis. At $85,000 per year, the manager was earning $1,634.61 per week. His pretrial period of termination from employment spans 153 weeks altogether. Therefore, his gross wage loss – assuming no replacement employment or other offsets – is $250,095.93, calculated by multiplying $1,634.61 by 153.

Adjusting Base Salary

            The better advocate will seek to augment the base salary before doing the math. There may be a number of reasons for using a base salary figure greater than the amount that appears on pay stubs or W-2 wage statements. These include:

  • The likelihood that the employee would have been promoted to a higher paying job during the back-pay period.
  • The likelihood that the employee would have received a pay raise during the time span.
  • The likelihood that the employee would have enjoyed a bonus or other salary enhancement during the same period.
  • The likelihood that the employee would have enjoyed a certain additional volume of overtime pay or received shift differentials or other forms of additional compensation.
  • The likelihood, in certain occupations, that the employee would have received an increased amount of commissions or gratuities.
  • Evidence that the employee suffered an unlawful reduction in his pay rate or in his hours, such that his last recorded payroll amount understates what he should have been earning.
  • Evidence that the employee was otherwise a victim of discrimination, such as a victim of the Equal Pay Act, or the Fair Labor Standards Act, resulting in an unfairly depressed amount of earnings prior to discharge.

 If competent, reliable, and admissible evidence can be gathered to support any of these conditions, an aggrieved employee can argue that his pretrial losses are greater than his prior paycheck suggests, justifying a higher award of back pay. In a fast-moving industry, for example, where wages are known to be growing by a certain percentage each year, it may be useful to produce documentary evidence of the wage growth or to call an expert witness on the subject. Published inflation rates, costs-of-living adjustments, and growth rates can provide other evidence to support an inference that an employee’s back pay would have been greater than his last paycheck indicates during a multiyear pretrial period. In fact, the Department of Labor’s Employment Cost Index provides a seasonally adjusted statistic that measures the change in employers’ payroll costs, yielding another factor by which wage growth can be gauged.

shutterstock_424016257The calculation of an accurate base pay can be particularly controversial in cases in which the employee claims she was forced to leave a job based on sexual harassment or other forms of job discrimination. For example, consider a regional sales manager who claims that her sales territory was systematically eroded and redrawn by her boss in retaliation for her cooperating in another sales manager’s sex discrimination claim during the course of a protracted EEOC investigation.

The cooperating employee (sales manager) arguably has a claim for Title VII damages based on retaliation by the employer. She asserts that as a result of the remapping of her sales territory, her annual earnings dropped from $110,000 in 2014 to $70,000 in 2015. She was terminated from employment on what she claims were false pretenses in 2015. In her wrongful discharge lawsuit, she may wish to establish that her base earnings, for purposes of calculating base pay, were $110,000 rather than the $70,000 per annum which she claimed at the end of her employment. If she can establish her sales territory – and thus her earnings – were diminished as a result of employer retaliation, then her base wage figure would be the greater amount.

The amount of base salary must also be adjusted upward to reflect any bonuses or additional compensation that was routinely paid by the employer. If an employee always received a fixed bonus at the end of each calendar year, then the calculation is quite easy and predictable. If the amount of bonus was tied to employer earnings or to employee performance, then additional evidence will need to be gathered so that a trier of fact will infer that the base salary – as augmented – reflects a rational aggregate amount of earnings for displaced employee.

Adjusting the Back-Pay Period

            Back pay runs from the date the employee was terminated (or from the date that she suffered another adverse employment action) to the date of judgment at the conclusion of trial –unless there is some reason to shorten the time period. For example, if an employee waited five years from the date of termination to the date of judgment, back pay of five years’ wages would not be reasonable if the company went out of business and terminated everybody three years after the employee was discharged. In this respect, plant closings, mass layoffs, periodic reductions in force, mergers and acquisitions, consolidation of divisions and departments, and discontinuation of product lines can all indicate that an employee’s actual work expectancy with a particular employer would have been limited following his termination.

            A back-pay period may also be compressed by a superseding event, such as the discovery that the employee had planned to quit and take another job, or perhaps return to school for an advanced degree, at a particular time in the future. Consider, for example, an employee who seeks back pay for a five-year period, but pretrial discovery reveals that she had accepted an offer of admission to medical school commencing in August of her second year following termination. It would seem unfair or illogical to assert that the employee would have remained at the job beyond the two-year mark had she not been terminated.

            shutterstock_396811084Most states also recognize a duty by the employee to mitigate her losses by actively seeking replacement employment. Thus, a terminated employee who remains employable, but forgoes available employment opportunities, may not be able to claim lost wages for a lengthy back-pay period. A court may equitably constrict the back-pay period to end on a date by which, in the court’s view, the employee should have obtained replacement employment.

            Evidence that the employee would have been fired from the job at some subsequent point, for reasons unrelated to her discharge, could also warrant a compression of the back-pay period. So, for example, if an employee charging discrimination and seeking back pay for a five-year period was determined one year after his discharge to have embezzled $500,000 several years earlier, the back-pay period would extend only for one year, to the point when the employer actually discovered the embezzlement.

Other Adjustments

            Back pay need not be discounted like front pay because it’s being paid after the fact. Because it’s being paid later than it would have been earned, had there not been termination from employment or other adverse employment action, back pay should enjoy the opposite time-value effect: that is, it should bear interest. The right to pre-judgment interest, in fact, is recognized in many federal and state statutes and in most state civil codes. The amount of interest can be tied to federal Treasury bill rates, adjusted prime rates, or other commonly recognized interest rates, or it may be set by state law or in court rule in a particular case.

            Of course, back pay is also taxable, like any form of earned wages. If an employment law dispute leads to a settlement, and the assumption is that the employee will be responsible for his own tax liability, then the settlement should be based on gross pretax wages and benefits. If an employee will recover a significant lump sum in settlement of a claim, or if he wins a substantial judgment, the payment of a large sum in one calendar year may have significant tax consequences for the employee, which ought to be considered and addressed in the litigation or the settlement. Victims of job discrimination who receive lump-sum back-pay awards covering a multiyear period are likely to incur higher federal and state income taxes than they would have had they received their wages in due course, a fact that the IRS has sought to address.

 

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Terminated..but seeking relief. How to calculate Front Pay.

Getting the bootFront pay is compensation for future wage loss that results from present employment-related circumstances.  In most scenarios, it serves as a form of future wage-based restitution for victims of job discrimination.  However, front pay is only available where reinstatement is not possible or appropriate. Thus, if a job has been filled or no longer exists, or if the employer-employee relationship has been so severely damaged that the relationship is unsalvageable, then front pay may be awarded as an item of damages.

In a Title VII employment discrimination case, one federal court has articulated nine factors to be considered in determining whether to award front pay to a successful plaintiff: (1) whether the employer is still in business, (2) whether there is a comparable position available for the employee to assume; (3) whether an innocent employee would be displaced by reinstatement; (4) whether the parties agree that reinstatement is a viable remedy; (5) whether the degree of hostility or an animosity between the parties – caused not only by the underlying offense but also by the litigation process – would undermine reinstatement; (6) whether reinstatement would arouse hostility in the workplace; (7) whether the employee has since acquired similar work; (8) whether the employee’s career goals have changed since the unlawful termination; and (9) whether the employee has the ability to return to work for the defendant employer – including consideration of the effect of the adverse employment action on the employee’s self-worth.

Therefore, before thinking about front pay, employment lawyers must think about the prospects of reinstatement for the aggrieved employee, and whether they are likely to recover front pay in a contested case.

In calculating front pay owed to a victim of employment discrimination, the following basic rules must be followed:

  • There must be a start date (usually the date specified in a settlement or the date of a judgment).
  • There must be an end date (based on work-life expectancy or other factors).
  • There must be an adjustment for wages the employee could earn in the future using reasonable efforts.

Other adjustments may be warranted because of the particular character of the parties or the peculiar circumstances of a dispute.  For example, a front pay award may be reduced by a factor that represents an employee’s uncertain future in a position (such as may be determined based on the employee’s declining health or a history of short-term employment and frequent job-hopping).  The calculation of front pay may be adjusted to account for the availability of comparable employment opportunities and the time reasonably required for the employee to secure substitute employment. For older employees, it may also be adjusted to take into consideration the employee’s projected retirement age.

Front pay can also include projected promotions, bonuses, pay raises, and cost-of-living increases that the employee would have enjoyed had she not been terminated or forced to leave the job.  However, proof of such enhancements will need to be gathered and produced in the form of admissible evidence before a court will infer that an employee would have earned greater amounts of compensation in the future.

A court considering an employment discrimination case may also apply other factors to substantiate the likelihood that an employee seeking front pay would likely have earned future wages with the same employer over a particular period of time.  These may include, for example, the employee’s intention to remain with the employer until retirement, the length of time other employees typically hold such positions, the length of time persons in similar positions at other companies generally hold such positions, and the status of the current job market and industry

Calculating Front Pay

The basic unadjusted formula for front pay is essentially the same as the basic formula for loss of future earnings by personal injury lawyers.  Since we know what the employee would have earned in future years (or at least we are proceeding on that assumption), our objective is to determine the present value (PV) of the future wage loss. We thus begin with the formula for present value:

Front Pay Formula 1Awhere FV equals future value, i equals interest rate or discount rate, and n is the number of years.

Assume that an employee would have earned exactly $100,000 for five more years, at which time he would have resigned or retired from employment.  The question, unaffected by any adjustments or special considerations discussed above, is simply: what is the PV of  $100,000 paid in each of five consecutive y ears? To  answer this question, we must add the PV of $100,000 in year 1 to the PV of $100,000 in year 2, to the PV of $100,000 in year 3, and so forth until year 5. The formula is:Front Pay Formula 1B Let’s assume that the applicable discount rate (i) will be 4% (or .04) throughout the five-year period. Here’s the math:Front Pay Formula 1C

PV = $95,153.85 + $92,455.62 + $488,899.64 + $85,480.42 + $82,192.71

PV = $444,182.24

So, assuming no other considerations, we can say that the discounted amount of future wage loss (that is, the front pay for the five-year period) would be $444,182.24.

We may wish to modify the numerator in each the fractions above if we could establish, for example, that the employee seeking front pay would have enjoyed certain increased wages after two years.  The same would hold true if we has reason to believe that the employee’s income would decline at some point over the five years.

We may also wish to modify the denominator in the fractions above if we have reason to believe that interest rates (discount rates) would increase or decrease at some point during the five-year period. Growth rates and inflation rates may also offset our discount rate.

While this hypothetical assumes a five-year wage loss, other cases may suggest that the Damages.1aggrieved employee would have continued working for the employer for the rest of his life, or,  more appropriately the rest of his working life.  The cutoff date for front pay, however, cannot be arbitrarily pinned to a projected retirement age (such as 65 or 70).  The more reliable approach is the LPE method, which considers the possibility that a particular individual will be living (L), that he will be participating (P) in the labor force, and that he will be actually employed (E). The product of these three probabilities, L x P x E, indicates an arguably more accurate statistic in determining work-life expectancy. (This will be the subject of a future blog). Notwithstanding this approach, many courts have expressed a reluctance to award front pay beyond 10 years.

In order for a front-pay formula to be accepted, it must therefore rationally adjust for the realities of the workplace, the logical progression of the employee’s work life, and other applicable factors.  Consider, for example, an employee who has lost a job paying $100,000 per year, but has been able to find a new job paying $55,000 per year.  Her front pay is thus reduced by her replacement pay, leaving her with a net annual loss in the future earnings of $45,000 per year.  Let’s also assume that the employee’s employment history, pretrial testimony, and personal characteristics lead to the conclusion that she would have worked for the first employer for only four more years. Let’s also assume that earnings were expected to grow at 2% during the four-year span, and the interest rate was set at 4%. Here is how to proceed:

Step 1: Determine the net discount rate (NDR). The NDR is technically more accurate than a simple discount rate because it considers both the market interest rate and a growth rate. We might therefore say that the net  discount rate is nothing more than the discount rate (or market interest rate) minus the growth rate. Thus, NDR = i – g, where “i” is the interest rate and ‘g” is the growth rate. In our hypothetical, the interest rte is 4% and the growth rate is 2%; therefore, NDR = 4 – 2, or 2%.  The more accurate adjustment for NDR, however, comes from a slightly more complicated formula, which will produce a result close to 2%, but even more precise:

Front Pay Formula 1D

        NDR = 1.01960 – 1

       NDR = 0.01960%

NDR = 1.96%

            Step 2: Determine the net wage loss per year. As noted above, if the employee was earning $100,000 at the first job, and now earns $55,000 at the second job, her net wage loss per year is $45,000.

Step 3: Plot the formula by adding PVs for each year.  Restate the PV value formula for each year in question.  The numerators should state the amount of future net wage loss, and the denominators should state the NDR (1 + NDR). The NDR for each year is raised to the nth power, where “n” equals the year in question.  The sum of each year’s PV calculation provides the PV for the entire four-year stream.

Front Pay Formula 1E

PV = $44,134.95 + $43,286.53 + $42,454.43 + $41,638.32

PV = $171,514.23

Therefore, the employee in this hypothetical case scenario would be entitled to front pay of $171,514.23.

 

 

 

 

 

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Finding the Value of Lost Fringe Benefits

Benefits Button

A party who has been wrongfully terminated from employment may not only be claiming lost wages but also a loss of fringe benefits. While fringe benefits are not always delivered in the form of monetary compensation, they may include quantifiable values for lost health insurance, including hospital, medical and disability plans, life insurance, pension plans and other retirement programs.

They may also include the value of lost stock options, stock purchase plans and other profit-sharing programs, as well as lost sick leave, personal leave and other paid time off, maternity leave, vacation pay, holiday pay, travel pay, shift premiums, expense accounts, counseling programs, day care facilities, tuition reimbursement, credit union memberships, fitness and recreation programs and gym memberships, unemployment compensation, workers’ compensation insurance,  housing subsidies, relocation assistance, company cars, company laptops, legal aid, and bonuses.

Assume, for example, that an employee would be required to expend $12,000 per year to replace his company-sponsored family health insurance plan, either through the payment of COBRA continuation benefits or by purchasing a private health plan for his family. Let’s also assume that the employee would lose $6,500 per year in employer contributions to his pension plan. The employee could argue that, in addition to his loss of salary, he lost a total of $18,500 per year in fringe benefits. If his annual salary loss were $85,000, then he would argue that his annual wage-and-benefit loss amounted to $103,500.

Another approach is to determine the fringe rate. This is a percentage of earnings attributable to the value of the fringe benefits. The fringe rate is calculated as the total dollar value of all fringe benefits (TFB) divided by gross earnings (GE).

Fringe Rate = TFB/GE

If the total of all fringe benefits was $17,000, then we could easily find the fringe rate:

Fringe rate = $17,000/$85,000 = 0.2

In this example, the fringe rate is 0.2 or 20%. Thus, 20% becomes the factor by which base wages must be enhanced to account for the loss of fringe benefits. A wage loss of $85,000, caused by a wrongful discharge from employment, and subject to a fringe rate of 20%, would then be enhanced to reflect an annual wage-and-benefit loss of $102,000. If the wage loss in the next year was found to be $90,000, and assuming a constant fringe rate, then the next year’s wage-and benefit loss would rise to $108,000.

While these calculations are quite simple, it may be necessary to consider other, more mathematically complex, calculations, for lost benefits such as stock options and Social Security benefits, and setoffs (if applicable and recognized) for severance pay, unemployment compensation, public welfare and health care assistance programs, and third party charitable donations of replacement benefits.

Itemized Present Value Approach

Returning to the first example above, an employee would only be entitled to $18,500 in fringe benefits if those benefits were immediately deliverable to the employee on the spot. In most cases, however, fringe benefits are delivered over time, and they are offered in the form of many different kinds of benefits which inherently have their own payout dates and methods.

So, for example, consider an employee who has been wrongfully terminated from employment. She enjoys a family health insurance plan that would cost her $8,000 per year to replace. At the time of her discharge, she has 10 more work years until retirement. Assume no increase in health insurance costs, and for purposes of this example, assume that the employee cannot find a suitable replacement job. The employee would need $80,000 to replace the value of this lost benefit.Employment Contract

Assume, too, that the employee lost the benefit of a company car, which saved her $2,000 per year in personal car expenses. Prior to the date of the termination of employment, the employer announced that it would be phasing out its company car program in three years. Therefore, the employee could claim a loss of this benefit for three more years, representing a loss of $6,000. The employee also enjoyed a defined benefit pension contributions by the employer valued at $4,800 per year and had every expectation of receiving such contributions for the remaining 10 years of her work life. Assuming no change in the value of the employer’s contributions, the employee would thus be entitled to another $48,000 in pension benefits.

Because the employee has made a claim for damages today, we must ascertain the present value of each of these future fringe benefits. Let’s assume a hypothetical 4% discount rate for each of the specified benefits:

Benefit           Annual Value       Years Remaining     Total Value    Present Value

Health Ins.                $8,000                       10                      $80,000           $54,046.75

Company Car             $2,000                         3                      $  6,000           $   5,333.98

Pension Fund             $4,800                       10                      $48,000           $32,428.05

                                                                     TOTAL —>        $134,000         $91,808.78       

So, using the 4% discount rate, we arrive at a total present value of $91,808.78 in lost fringe benefits for the terminated employee. This is the amount that the Defendant-employer would be required to pay in damages today to compensate the employee for future fringe benefits alone, were she to prevail on her claim (or settle her claim for full value).

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Refresher Course 103: Rate of Return

The Rate of Return (ROR) is a generic reference to the gain or profit derived from a certain decision, investment or action. There are, in fact, many different kinds of rates of return, and a variety of formulas for determining the benefit or profitability of decision, investment or action. Calculating rates of return is another useful tool for attorneys and business managers engaged in a variety of practice specialties.

The basic calculation for ROR is expressed as a fraction. The numerator is generally the difference between the money invested or lost and the money earned, gained or received. The denominator is the money invested or lost. The basic formula is:
 ROR =  fV  –  iV / iV    [Final Value minus Initial Value divided by Initial Value]

  • ROR  = Rate of Return
  • fV  = Final Value (Money earned, gained or received)
  • iV = Initial Value (Money spent, invested, or lost)

EXAMPLE:

Assume, for example, that you invested $1,000 in a business activity. At the end of one year, your initial investment of $1,000 paid off, yielding $1,500. Your iV would be $1,000, and your fV would be $1,500. What is your ROR? Applying the formula, we find that the ROR is 50%

ROR =  fV-iV / iV

=  $1,500 – 1,000 / $1,000

=  $500  –  $1,000

=   1/2  =  50%

Of course, the ROR must be considered in the context of other external factors, such as the inflation rate and the tax consequences. In future articles, we will discuss other rates of return, including return on investment (ROI), return on equity (ROE), and return on assets (ROA), as well the internal rate of return (IRR) and net terminal value (NTV).

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Refresher Course 102: Determining Probability

The probability of a single event happening is the number of desired outcomes divided by the number of possible outcomes. It is the number of ways in which an event can occur divided by the number of possible events. To determine a probability, we start with a fraction. So, for example, if we wished to determine the probability of tossing heads up on a coin toss, the fraction would look like this:

Number of ways in which a coin can land heads up
_______________________________________  =     1/2
Number of possible ways in which the coin can land

The probability of 1/2 can then be converted to a decimal figure (0.5) or a percentage (50%). Thus, there is a 50% probability that by flipping a coin, it will land heads up.

Consider another example: Assume there is a tray of cupcakes, consisting of four chocolate cupcakes and six vanilla cupcakes. Assume also that it is impossible to tell them apart until one bites into them. What is the probability of choosing a chocolate cupcake? A vanilla cupcake? A chocolate or vanilla cupcake?  If you answered 2/5, 3/5 and 1, you would be correct.

THE EQUATIONS:

Probability of choosing chocolate =  Number of chocolate cupcakes / Total number of cupcakes  = 4/10 = 2/5                     

Probability of choosing vanilla = Number of vanilla cupcakes / Total number of cupcakes       = 6/10 = 3/5

Probability of choosing a chocolate or vanilla cupcake = Number of vanilla cupcakes/ Total number of cupcakes = 10/10 = 1

Another way to express these fractional results is in the form of percentages. In other words, there would be a 40% probability of picking chocolate, a 60% probability of picking vanilla, and a 100% probability of picking one or the other.

Probability calculations are another useful tool that can aid attorneys in making judgments or providing advice. Consider, for example, an employment discrimination case which has been scheduled for a trial by jury. Fifty local citizens have reported to the local courthouse for jury duty, of which 35 are Caucasian, 10 are African American, and 5 are Hispanic. Of the jurors, 18 are under the age of 30; the remainder are 30 or older. Half are male; half are female. Can you quickly calculate the probability of the events listed in the left column below without looking at the answers in the right column below?

                                                                                                                                              Answer

What is the probability that:

  1. The first juror selected from the jury pool will be Hispanic?                                 10%
  2. The first juror selected will be a woman?                                                                 50%
  3. The first juror selected will be under 30 years old?                                                36%
  4. The first juror selected will be either Hispanic or Caucasian?                                80%
  5. The second juror selected will be an African American                                                   (assuming that the first juror selected from the jury pool                                                   was not African American)                                                                                            20.4%
  6. The second juror selected will be an African American                                                       (assuming that the first juror selected from the jury pool                                                   was African American)                                                                                                  18.37%

 

 

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Refresher Course 101: Simple Interest

Before we dive into formulas, let’s review some basic calculations, including the equation for calculating simple interest. Because money has time value, we apply interest as the basic equalizer. Simple interest calculations account for the time value by raising the principal to a higher number. Calculating interest is a very basic and commonly understood process, but understanding the equation can lead to a number of other helpful determinations.

Let’s begin with the basic simple interest formula. Assume that a client has borrowed $10,000 for six months at an annual interest rate of 5%. The question is: what will the client pay in interest on the principal of $10,000, over a six-month period, at an interest rate of 5% per year?

The formula is:

I = P  x  i  x  n

I = interest

P = principal

i = interest rate (per month)

n = number of months

To calculate simple interest, we simply multiply principal by interest rate by the number of months (or other time periods) during which the loan remains open.

Here’s the math:

I = P   i  x  n

I = $10,000  x  5%  x  6/12  (6 months in a 12-month period, since the interest rate is annual)

I = $10,000  x  0.05  x  0.5

I = $250

Thus, the client will pay $250 in simple interest on a $10,000 loan at 5% over 6 months. The client will have repaid the loan principal and interest in the total amount of $10,250.

Interest on Overdue Settlement

Let’s apply the simple interest calculation to another scenario. Let’s assume that $10,000 was the settlement reached in an employment dispute. Three months after the settlement is reached, however, the employer has failed to remit payment of settlement funds. The Plaintiff’s lawyers allow for a reasonable 30-day waiting period but claim that three months is unreasonable. They are now seeking two months’ interest on the $10,000 settlement, based on an annual interest rate of 3%. Here’s the formula:

I = P  x  i  x  n

I = $10,000  x  3%  x  2/12

I = $10,000  x  0.03  x  0.1667

I = $50.01

Thus, the employer will now be required to pay $10,050.01, assuming there are no further delays in tendering payment of the settlement funds.

 

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Introducing…. “The Calculating Lawyer”

Today the King of Formulas becomes “The Calculating Lawyer.”  I am re-branding the King of Formulas in an effort to focus attention on the real mission of this blog — to offer more specific and practical answers to real-life legal questions. What’s the value of an injury? The value of a human life? How much is a broken marriage worth? What about a stolen copyright?  Or a contaminated water well?  How much does a sexually harassed office worker deserve for her compensation?

All of these questions have answers, and many of those answers can be expressed in mathematical terms. In some cases, there are precise scientific formulas that are universally accepted among financial and accounting experts. In other cases, the best we can do is to use numbers to offer insight and guidance and to inform our judgment and decision-making.

While I’m re-naming the blog as “The Calculating Lawyer,” I hope my non-lawyer followers will stay on board. I won’t be writing in legalese. And the discussions which will be flowing here will have many practical applications for conducting business, making consumer choices, personal investments and family decisions.

Hopefully, too, as I retire “The King of Formulas,” I will lose those few followers who thought perhaps I was concocting scientific formulas — no, I’m not a chemist — and those nutritionally minded folks who inadvertently thought I had some expertise in food supplements or other such “formulas.”

If you are interested in how numbers intersect with the study of legal damages, please post post your comments on this blog. Please also read my book, Formulas for Calculating Damages, published by the American Bar Association.  http://ow.ly/5hJL300c7UX.  Visit my website at http://www.guralnicklegal.com

          —- Mark S. Guralnick

 

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Growing the Trust Fund: How much do you need today?

So you want to stash away some money for your children —  a trust fund.  Or perhaps you need to fund a support trust for an elderly family member. If you want the fund to generate the same amount of money every year, year after year, then you need to consult the simple formula for the present value of a perpetuity — which I discussed in my post on January 21, 2012.  (See KingofFormulas.com)

But what if you wanted your trust fund to generate an increased amount of money every year.  Perhaps you want it to increase by 2% every year (to cover the increasing costs of college tuition, living expenses, or health care costs, as the case may be).

What will it cost you in today’s dollars to generate, say, $100,000 per year, increasing by 2% each year, in perpetuity?

Assume the interest rate over time will be 3.5%.

The formula is: PV (Perpetuity) =  P/i  g.  That is, the present value (PV) of a growing perpetuity equals the payment (P) divided by the interest rate (i) minus the growth rate (g).

Here’s the math:

PV = P/i – g

PV = $100,000/.035 – .02

PV = $100,000 / – 0.15

PV = $6,666,666.67

So, in order to generate $100,000 per year, increasing by 2% each year, in perpetual trust funds, you will need to deposit $6,666,666.67 in the bank today. Provided that the interest rate of 3.5% remains intact, the account will generate the necessary funds each year.

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