Employment
&

Labor
Relations Law

AMERICAN BAR ASSOCIATION

  Section of
Litigation Committee on Employment and Labor Relations Law

 

Winter
1992



Expert Assistance
in Wrongful

Termination Litigation

 

Thomas
M. Neches, CPA*

Peter
D, Wrobel, MBA, CPA*

 

Wrongful
termination cases often involve accounting, financial and economic issues.
Expert assistance offered by certified public accountants (“CPAs”)
can be essential in preparing and defending these claims. In this article we
discuss some of the issues which have arisen in our experience as expert
witnesses and consultants in wrongful termination litigation.

 



LIABILITY ANALYSIS

 

Attorneys
usually consult with CPAs only for calculating economic damages. However, we
also can be helpful in the liability phase of trial.

An
effective way to present or rebut the case for liability is to utilize CPAs to
perform quantitative analyses of the plaintiff’s performance.

 

CPAs
can compare the plaintiff’s performance to objective standards such as
contractual goals or quotas, company standards or the performance of
co-workers. In defense of a claim by a terminated telephone operator, for
example, we prepared a statistical analysis demonstrating that the calls
handled per day by the plaintiff were below the company-set standard and less
than those handled by other operators of equivalent training and experience.
The case was settled with a de minimis
payment.

 

When
evaluating an executive’s job performance, the CPA may analyze the operating
results of the particular division directed by the executive. The analysis
should isolate the executive’s performance from other factors. For example, in
a recent case on behalf of the plaintiff, testimony was presented at trial
regarding our accounting analysis, which showed that the defendant’s financial
statements did not depict accurately the plaintiff’s performance as manager of
a joint venture. Inappropriately allocated corporate overhead made the venture
appear unprofitable, when in fact its performance was outstanding. The
plaintiff prevailed and was awarded compensatory and punitive damages.

 

DAMAGES ANALYSIS

 

CPAs
are used both by plaintiffs and defendants to determine appropriate economic
damages and present their findings at trial. Important factors normally
considered include:

 

         
Lost
earnings

         
Damage
period

         
Mitigating
income.

 

Lost Earnings

 

Plaintiffs
are entitled to recover the difference between actual income and income which
would have been earned bad there been no wrongful termination. These damages
may include both actual and future lost earnings.

 

When
available, it is preferable to use the historical earnings history of the
plaintiff, rather than statistical averages, as the basis for projecting future
income. Historical earnings information may be obtained from a variety of
sources, including those shown in Table 1.



 



Table 1

Historical Earnings Data

 

Information

Past employment
earnings,

promotions and pay
raises

 

Average
historical hours worked and sick time taken

 

Commission and
bonus

arrangements

 

Employer’s policies
on salary

 

Pay raises for
similar employees

 

Value of stock
options or warrants

 

Retirement
benefits

Source

Forms W-4, tax returns,

payroll ledgers,
personnel files

 

Timesheets,
payroll ledgers

 

Personnel files,

employment contract

 

Employee manual

 

Payroll ledgers

 

Employment
contract

 

Employee manual,
employment

contract

 

 



Assumptions
regarding lost earnings should be realistic. We may research, for example, whether
or not it is appropriate to assume that past large bonuses would have continued
in the future, promotions would have continued at the same frequency or that
company-paid benefits would continue. These benefits may include health
insurance, life insurance,  pension
benefits and employer contributions on investment or retirement plans.

 

Damage Period

 

The damage period
is usually determined by the worklife expectancy of the plaintiff. The assumed
damage period typically will have a significant impact on calculated damages.

 

A good source for
worklife expectancy information are studies prepared by the Bureau of Labor
Statistics of the U.S. Department of Labor. These studies provide information broken
down by age, sex, education and whether or not the individual is currently
active in the work force.

 

We often
supplement worklife expectancy averages taken from government publications with
research on the facts and circumstances of the plaintiff’s employment
situation. We compile such information by:

 

·        
Researching company or industry statistics

·        
Documenting terminations of similar
employees

·        
Reviewing the plaintiff’s retirement
plans, medical records and personnel file

·        
Interviewing
personnel and retirement specialists at the plaintiff’s company.

 

In
a recent case the opposing expert retained by a 61-year-old ironworker
testified that the ironworker would have worked unitl age 67, based on national
worklife expectancy tables, To rebut this claim, we interviewed union
representatives, who told us that most union members retired at age 62 and
virtually all by age 65. Review of the union’s pension program confirmed these
observations. From an interview of the jury, which found in favor of the
defendant, the defendant’s attorney learned that the jury was favorably impressed
by this “go to the horse’s mouth” approach.

 

Once
the damage period is determined, assumed future lost income must be discounted
to present value. The discount rate used significantly impacts the present
value of a damage claim. To determine the discount rate we review the current
yields on low risk or no risk investments such as A-rated bonds or U.S.
Treasury notes. We also assess the risk associated with future receipts of
income, which may depend on projections of future employment and economic
trends.

 

Mitigating Income

 

In
most cases, the plaintiff has the obligation to mitigate losses. That the
plaintiff was unemployed or underemployed subsequent to termination does not
mean necessarily that these earnings are the fair measure of mitigation.
Important factors to be considered when calculating mitigating income may
include the plaintiff’s occupation, age, educational level, sex and race. We
also look at the current and forecasted economic climate in the plaintiff’s
occupation and related fields. These factors often are also important
considerations in determining how long the plaintiff reasonably should have
taken before finding alternative employment.

 

We
frequently compile information regarding appropriate mitigating income by:

           Reviewing the plaintiff’s previous
employment

           Using income tables from government
and industry publications

           Surveying the experience of similar
employees.

 

An
interesting factor to consider may be the  potential economic advantages of working less.
The plaintiff may have more time available to devote to a family business,
supervise investments or attend to household chores for which the plaintiff
formerly employed someone else. Staying at home may allow the plaintiff’s
spouse to work or may allow the plaintiff to reduce expenses such as child
care, travel and home maintenance.

 

Analyzing the
Opposition’s Damage Claim

 

CPAs
retained by either plaintiff or defendant should analyze thoroughly the
opposition’s claim and point out errors and overreaching assumptions. This remains
true whether or not you agree with the opposition’s methodologies. Critical
analysis of the opposition’s damages claim may convince the judge or jury to
adjust the amount of the damage award in your client’s favor.

 

Table 2 lists several
errors often found in wrongful termination damages analyses. In our experience
such errors occasionally deliberate.



Table 2

Common Errors in Wrongful
Termination Damage Claims



 

Mathematical Errors

           Arithmetic
and rounding errors

           Incorrect
formulas

Errors of Fact

           Wage
rates

           Pension
benefits

           Hours
worked per year

           Retirement
date

           Birth
date

           Available
alternative occupation

           Extent
of “disabilities” caused by termination

Incorrect Assumptions

           Wage
growth

           Damage
period

           Discount
rate

           Future
commissions or bonuses

           Profitability
of relevant companies

Incorrect Methodology

           Interpreting
or using tables incorrectly

           Not
including mitigating income

           Failing
to discount assumed future losses

           Claiming
inappropriate items in lost earnings

           Claiming lost revenue without
subtracting costs

 

 



SUMMARY

 

CPAs
offer valuable assistance in wrongful termination litigation. CPAs can help
attorneys establish or refute liability and determine the amount of damage
award. In preparing their analyses CPAs normally should supplement statistical
averages regarding factors such as worklife expectancy, fringe benefits and
alternative employment by reviewing the plaintiff’s individual work history,
company and industry.

 

*Thomas M. Neches,
CPA and Peter D. Wrobel, MBA, CPA
are partners at Simpson & Company,
located in Los Angeles, California. Simpson & Company specializes in
litigation services, which include investigative accounting, damage claims and
expert witness testimony. Mr. Neches and Mr. Wrobel have been retained as
expert witnesses and consultants on numerous wrongful termination cases.




IF YOU HAVE ANY QUESTIONS, PLEASE CALL THOMAS NECHES DIRECTLY AT 213.624.8150.

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