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    Wisconsin Lawyer
    September 08, 2020

    Employment Termination: Computing Economic Losses

    Although most workers in the United States can be discharged with or without cause, being terminated because of discrimination might be considered wrongful and provide the basis for suit against the former employer. An economist explains the methods judges and lawyers use to compute damages in wrongful-termination cases.

    Dr. Charles L. Baum

    money tree blowing away

    Federal courts can award damages for economic losses stemming from wrongful terminations of employment, such as ones in which the underlying reason for the termination is discrimination based on gender, sexual orientation, gender identity, race, national origin, or religion under Title VII of the Civil Rights Act; age under the Age Discrimination in Employment Act (ADEA); disability under the Americans with Disabilities Act (ADA); or pregnancy under the Family and Medical Leave Act (FMLA). In Wisconsin, the Fair Employment Act (WFEA) outlaws employment discrimination along many similar dimensions plus some additional ones, such as marital status and arrest and conviction record.1

    This article reviews methods used to calculate economic losses and evaluates whether these approaches are acceptable under federal and Wisconsin statutes and Seventh Circuit case law. Eight key elements are examined. Calculating economic losses in employment cases has become more important. During its 2019-20 term, the U.S. Supreme Court (in Bostock v. Clayton County, Georgia) reviewed several employment termination cases from lower courts and determined that the Civil Rights Act protects workers based on sexual orientation2 and gender identity.3

    Lost Earnings

    Economic losses from lost earnings are awardable in federal and Wisconsin employment termination cases to “make whole” wrongfully terminated workers.4 Damages for both back pay (lost earnings from the time of the termination to trial)5 and front pay (lost earnings after the trial)6 are available under federal employment laws, as they are under the WFEA,7 though reinstatement is available as a substitute remedy that is usually preferred to front pay.8 Factors to consider in the Seventh Circuit for lost front pay include “whether the plaintiff has a reasonable prospect of obtaining comparable employment, whether the time period for the award is relatively short, whether the plaintiff intended to work or was physically capable of working and whether liquidated damages have been awarded.”9

    Economic loss calculations often are based on the worker’s average earnings over the several years before the termination or on earnings at the time of the termination.10 This information is likely reported on income tax returns, W-2 forms, and pay stubs.11 When this information is not available, or when past earnings are not believed to be an accurate reflection of lost front pay, occupation-specific average earnings from the Bureau of Labor Statistics (BLS) for each state and metropolitan area may be considered.12 The U.S. Court of Appeals for the Seventh Circuit has refused to uphold damages for lost front pay when the plaintiff did not provide data essential for the calculations.13

    Fringe Benefits

    Many workers prefer to receive a portion of their compensation in the form of fringe benefits. According to the BLS, currently the average employer cost of fringe benefits for private-sector workers is 29.9 percent of total compensation and the average employer cost for public-sector workers is 37.7 percent of compensation.14 Common fringe benefits include insurance, retirement, and government-mandated benefits.

    The monetary value of a worker’s fringe benefits could be measured as the employer’s cost to provide them or by the terminated worker’s cost to replace them in the market.15 These amounts will differ when employers receive group rates or when benefits through employers are tax deductible. Lost fringe benefits are awardable as economic losses in federal16 and Wisconsin17 employment cases. However, in the Seventh Circuit, lost fringe benefits are not recoverable when the terminated worker incurred no explicit monetary costs from the benefit being lost, as would be the case with lost health insurance if that insurance was not replaced and no medical expenses were incurred.18

    Work-Life Expectancy

    Courts must determine the appropriate period over which to calculate losses when awarding damages for lost front pay. In the Seventh Circuit, this should be based on the time the plaintiff otherwise would have worked for the terminating employer.19

    Charles L. Baum IICharles L. Baum II is a professor with the Department of Economics & Finance at Middle Tennessee State University, Murfreesboro, Tenn., where he has taught courses on labor markets, unions, and collective bargaining since 1999.

    Three approaches have been used. First, courts have used the period to a typical retirement age, such as 65 years old or 70 years old.20 The Social Security normal retirement age (the age when a person first becomes eligible to retire and receive full Social Security retirement benefits) historically was 65 years, but it is increasing for individuals born after 1937: two months per year for individuals born in years 1938-1943 and 1955-1960, up to a maximum of 67 years for those born in 1960 or thereafter.

    Second, courts have used work-life projections.21 Work-life projections are published in tables created by economists based on government survey data and are functions of the probability of being alive, able to work, and in the labor force.22 Work-life projections are provided for each age and separately by gender, race, education, and labor force status (that is, for employed individuals and for unemployed individuals).

    Third, courts have used fixed post-trial periods (for example, five or 10 years).23

    Federal courts have accepted each approach. Regardless of the approach, federal courts have not allowed damages for lost front pay when the worker could not possibly have remained with the employer absent the termination, such as after firm layoffs or a plant closure.24

    Mitigating Factors

    People who are injured typically are expected to take action to limit the harm they suffer.25 Federal26 and Wisconsin27 courts expect that terminated workers who bring lawsuits will have attempted to minimize their losses by finding another job. In turn, courts have awarded economic damages for the difference in what earnings are projected to have been absent the termination and actual or projected earnings given the termination.28

    Terminated workers are required to use diligent efforts to find reasonably comparable employment.29 However, they need not “go into another line of work” or “accept a demotion.”30 The Seventh Circuit does not consider a lack of work because of an injury sustained after the termination31 or because of emotional problems caused by the termination32 to constitute a failure to mitigate. Terminated workers forfeit their right to damages in the Seventh Circuit if they do not use reasonable diligence to minimize losses and if it is reasonably likely that they could have found comparable replacement employment if they had, but the burden is on the defendant to prove these two elements.33 The defendant also has the burden to prove a failure to mitigate in Wisconsin suits under the WFEA.34

    Terminated workers may receive income or benefits from collateral sources. If subtracted from the damages award, the collateral benefits may become a windfall for the wrongdoer. If not subtracted, the plaintiff might receive a double recovery. Just the opposite, it would seem consistent for a payment from a fund financed by the defendant employer to be credited against any liability.35

    Federal courts in most circuits, including the Seventh Circuit, have wide discretion to deduct collateral benefits in employment cases.36 For example, some courts in the Seventh Circuit have subtracted unemployment benefits37 while others have not.38 Social Security disability income (SSDI) benefits have39 and have not40 been used as offsets. Quite differently, in Wisconsin cases under the WFEA, unemployment compensation and welfare payments received by the plaintiff are to be deducted from any back-pay award and transferred to the appropriate state agency or reserve fund41 – simultaneously preventing both a windfall and a double recovery.

    Growth Rates

    Economic theory predicts wages will grow over time, with price inflation and labor productivity, and over a worker’s career, with on-the-job training and work experience. Federal courts have awarded economic losses for lost front pay with wage growth incorporated.42 Courts have based wage growth on the rate of past raises and salary increases.43

    Historical rates of wage growth can be calculated from data provided by the BLS. The BLS Current Employment Survey provides wage information for production and nonsupervisory workers, and the Employment Cost Index does so for civilian workers.44 Future wage growth forecasts are provided by economists for the Economic Report of the President, the Congressional Budget Office, and the Social Security Advisory Board.45 In the absence of a history of past raises or evidence of anticipated future raises, federal courts have declined to include wage growth, on the grounds it is too speculative.46

    Discounting to Present Value

    Federal courts typically require that future losses be discounted to present value.47 The reasoning is that a lump-sum damages award invested by the terminated worker will grow to the amount of the future loss when that loss would have occurred. This is necessary because invested money earns interest.

    Courts in federal employment cases have used three methods for present-value discounting. The case-by-case method uses separate and independently determined rates for future wage growth and present-value discounting. The below-market discount method uses a “real” wage-growth rate and a “real” interest rate for discounting, which are rates with the effects of price inflation deducted. The total-offset method uses the same rate for wage growth and present-value discounting such that the two cancel each other out, resulting in no explicit adjustments for either.

    Neither the Seventh Circuit (for federal matters) nor Wisconsin courts (for suits under the WFEA) have registered a preference for any of these methods, although there is almost no evidence from case law in this circuit that the below-market discount method or the total-offset method has been used.

    In a few cases in the Seventh Circuit, future losses for lost front pay were not discounted to present value because price inflation and wage growth were not included.48 A court might decline to award damages for lost front pay in the Seventh Circuit if information needed for present-value discounting is not provided.49 Other circuits have used the other methods; for example, the Second and Fifth Circuits have used the below-market discount method,50 and the Third and Sixth Circuits have used the total-offset method.51

    Courts in federal employment-termination cases indicate the interest rate to use for present-value discounting should be one on “the best and safest investments,”52 but no further guidance is provided. Interest rates are higher on riskier investments, all else equal, to compensate investors for assuming risk. Interest rates are also higher, all else equal, on investments with longer maturities, because risk (or uncertainty) increases with time. Many consider short-term government securities to be the investment closest to being risk free.53 Treasury bills are securities with a maturity of one year or less, while treasury notes have maturities of more than one but less than 20 years and treasury bonds have maturities of 20 or more years.

    Interest rates for discounting could be based on historical averages, the current rate, or a forecast of future rates. Information on historical and current rates is available from the Federal Reserve Bank.54 Reasonable periods for historical averages may be 20 or 30 years. Alternatively, a past period equal to the length of the future period over which lost front pay is projected may be appropriate for historical averaging. Current rates indicate the amount of interest that can be earned on investments made today but may not represent future rates.55 Future interest rates are forecasted by economists for the Economic Report of the President, the Congressional Budget Office, and the Social Security Advisory Board.56

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    Prejudgment Interest

    According to the economic theory for the time value of money, increasing past losses for interest is the mirror image of discounting future losses for interest. Federal courts retain discretion to include prejudgment interest for the lost use of back pay in economic damage awards.57 This is part of the process of making wrongfully terminated workers whole, because their lost pay if invested could have grown with interest.58

    Federal statutes do not define the rate to use to calculate prejudgment interest. The Seventh Circuit seems to endorse the federal prime rate.59 Federal statutes specify the rate for postjudgment interest to be that on the 52-week treasury bill,60 and that rate has been used for prejudgment interest in federal employment termination cases as well.61 Interest should compound annually.62 In Wisconsin, courts should provide prejudgment interest on lost back pay awarded under the WFEA.63

    Tax Adjustments

    The U.S. Supreme Court has ruled that awards for economic damages in employment termination cases are taxable as income.64 However, the tax owed on an award for economic losses may be different than the taxes that would have been paid on the earnings when otherwise received.

    First, a lump-sum payment, if sufficiently large, might move the terminated worker into a higher federal income tax bracket during the award year.65 Second, payroll or FICA taxes for Social Security and Medicare might not be owed on income from a damages award but would have been owed on earnings from employment.66 Third, worker contributions toward many fringe benefits, such as health insurance, are tax deductible but a damages award for lost fringe benefits will be taxed as income.

    Historically, courts in the Seventh Circuit have not adjusted economic damages awards for tax differentials in employment cases,67 but that has recently changed. Awards to offset increased tax burdens are now available in this circuit.68 Somewhat differently, the court in several Seventh Circuit cases has based economic losses on net earnings after deducting taxes,69 which indirectly reduces damages awards for taxes.


    Lawyers and their clients likely must address eight key elements when calculating economic damages from wrongful employment terminations in federal and Wisconsin cases. The U.S. Supreme Court in June 2020 determined Title VII protections provided by the Civil Rights Act extend to sexual orientation and gender identity. In turn, the methods outlined above can be applied to a new set of employment termination cases.


    1 Wis. Stat. § 111.321.

    2 Bostock v. Clayton Cty., Ga., 140 S. Ct. 1731 (2020) (affirming Altitude Express Inc. v. Zarda, 883 F.3d 100 (2d Cir.2018) and reversing and remanding Bostock v. Clayton Cty. Bd. of Commissioners, 723 F. App’x 964 (11th Cir.2018)).

    3 EEOC v. R.G. & G.R. Harris Funeral Homes Inc., 884 F.3d 560 (6th Cir.2018), aff’d, Bostock, 140 S. Ct. 1731.

    4 Albemarle Paper Co. v. Moody, 422 U.S. 405, 418 (1975).

    5 Id.

    6 Williams v. Pharmacia Inc., 137 F.3d 944, 952 (7th Cir. 1998).

    7 Kempfer v. Automated Finishing Inc., 211 Wis. 2d 100, 120, 564 N.W.2d 692 (1997).

    8 McNeil v. Economics Lab. Inc., 800 F.2d 111, 118 (7th Cir. 1986).

    9 Downes v. Volkswagen of Am. Inc., 41 F.3d 1132, 1141 (7th Cir. 1994).

    10 Pace v. Pottawattomie Country Club Inc., No. 3:07-CV-347-RM, 2009 WL 4843403, at *2 (N.D. Ind. Dec. 11, 2009).

    11 Stragapede v. City of Evanston, 125 F. Supp. 3d 818, 829 (N.D. Ill. 2015).

    12 U.S. Bureau of Labor Statistics, Occupational Employment Statistics.

    13 McKnight v. General Motors Corp., 973 F.2d 1366, 1372 (7th Cir. 1992).

    14 U.S. Bureau of Labor Statistics, U.S. Department of Labor, Employer Costs for Employee Compensation – September 2019.

    15 Stragapede, 125 F. Supp. 3d at 831.

    16 Downes, 41 F.3d at 1142.

    17 Kempfer, 211 Wis. 2d at 107.

    18 Syvock v. Milwaukee Boiler Mfg. Co., 665 F.2d 149, 161 (7th Cir. 1981).

    19 McKnight, 973 F.2d at 1372.

    20 Wilson v. AM Gen. Corp., 979 F. Supp. 800, 802 (N.D. Ind. 1997).

    21 Tyler v. Bethlehem Steel Corp. 958 F.2d 1176, 1188 (2d Cir. 1992).

    22 Gary R. Skoog, James E. Ciecka & Kurt V. Krueger, The Markov Process Model of Labor Force Activity: Extended Tables of Central Tendency, Shape, Percentile Points, and Bootstrap Standard Errors, J. Forensic Econ., 22 (2): 165-229 (2011).

    23 Pierce v. Atchison, Topeka & Santa Fe Ry. Co., 65 F.3d 562, 574 (7th Cir. 1995).

    24 Gunter v. Bemis Co., 906 F.3d 484, 492 (6th Cir. 2018); Seep v. Commercial Motor Freight Inc., 575 F. Supp. 1097, 1110 (S.D. Ohio 1983).

    25 Kempfer, 211 Wis. 2d at 120.

    26 Brown v. Smith, 827 F.3d 609, 615 (7th Cir. 2016).

    27 Wis. Stat. § 111.39(4)(c).

    28 Ford Motor Co. v. EEOC, 458 U.S. 219, 231 (1982).

    29 Mattenson v. Baxter Healthcare Corp., 438 F.3d 763, 771 (7th Cir. 2006).

    30 Ford Motor Co., 458 U.S. at 231.

    31 Best v. Shell Oil Co., 4 F. Supp. 2d 770, 773 (N.D. Ill. 1998).

    32 Ward v. Tipton Cty. Sheriff Dep’t, 937 F. Supp. 791, 798 (S.D. Ind. 1996).

    33 Hutchison v. Amateur Elec. Supply Inc., 42 F.3d 1037, 1044 (7th Cir. 1994).

    34 Anderson v. LIRC, 111 Wis. 2d 245, 258, 330 N.W.2d 594 (1983).

    35 Flowers v. Komatsu Mining Sys. Inc., 165 F.3d 554, 558 (7th Cir. 1999).

    36 EEOC v. O’Grady, 857 F.2d 383, 389 (7th Cir. 1988).

    37 Bowe v. Colgate-Palmolive Co., 416 F.2d 711, 721 (7th Cir. 1969).

    38 Stragapede, 125 F. Supp. 3d at 826.

    39 Flowers, 165 F.3d at 558.

    40 Stragapede, 125 F. Supp. 3d at 826.

    41 Wis. Stat. § 111.36(3)(b); Kelley Co. v. Marquardt, 172 Wis. 2d 234, 253, 493 N.W.2d 68 (1992).

    42 Branham v. Snow, No. 1:01-cv-0152-JDT-WTL, 2006 WL 3230310, at *15 (S.D. Ind. 2006).

    43 Hathaway v. New Dimension Ctr. for Cosmetic Surgery, No. 03 C 5848, 2006 WL 1594060, at *3 (N.D. Ill. June 6, 2006).

    44 U.S. Bureau of Labor Statistics, Current Employment Survey, Employment, Hours, and Earnings of Production and Nonsupervisory Employees, (Databases, Tables, and Calculators by Subject) (2019); U.S. Bureau of Labor Statistics, Employment Cost Index, Historical Listing – Volume 5, (Table 8) (2019).

    45 Chairman of the Council of Economic Advisers, Economic Report of the President, March 2019; Congressional Budget Office, An Update to the Budget and Economic Outlook: 2019-2029 (August 2019 update); Social Security Administration, 2019 OASDI Trustees Report (2016 OASDI Trustees Report, Economic Assumptions and Methods, tables V.B1 and V.B2).

    46 Kolb v. Goldring Inc., 694 F.2d 869, 873 (1st Cir. 1982).

    47 McKnight, 973 F.2d at 1372.

    48 Wilson, 979 F. Supp. at 802.

    49 McKnight, 973 F.2d at 1372.

    50 Rhodes v. Guiberson Oil Tools, 82 F.3d 615, 622 (5th Cir. 1996).

    51 Killian v. Yorozu Auto. Tenn. Inc., 454 F.3d 549, 558 (6th Cir. 2006).

    52 Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 537 (1983).

    53 Price v. Marshall Erdman & Assocs. Inc., 966 F.2d 320, 327 (7th Cir. 1992).

    54 Board of Governors of the Federal Reserve System, Economic and Research Data (2019), (Selected Interest Rates – H.15).

    55 Joseph I. Rosenberg & Rick R. Gaskins, Damage Awards Using Intermediate Term Government Bond Funds vs. U.S. Treasuries Ladder: Tradeoffs in Theory and Practice, J. Forensic Econ., 23 (1): 1-31 (2012).

    56 See supra note 45.

    57 Hutchison, 42 F.3d at 1047. It might be that prejudgment interest and liquidated damages are not simultaneously available in ADEA cases, as in Fair Labor Standards Act cases, but it seems clear that prejudgment interest is available in ADEA cases in the absence of liquidated damages. Coston v. Plitt Theaters Inc., 831 F.2d 1321, 1335 (7th Cir. 1987).

    58 Downes, 41 F.3d at 1144.

    59 Gorenstein Enters. Inc. v. Quality Care-USA Inc., 874 F.2d 431, 437 (7th Cir. 1989).

    60 28 U.S.C. § 1961.

    61 Ward, 937 F. Supp. at 800.

    62 Best, 4 F. Supp. 2d at 773.

    63 Anderson, 111 Wis. 2d at 258.

    64 United States v. Burke, 504 U.S. 229 (1992).

    65 Eshelman v. Agere Sys. Inc., 554 F.3d 426, 441 (3d Cir. 2009).

    66 Burke, 504 U.S. at 231.

    67 Best, 4 F. Supp. 2d at 776.

    68 EEOC v. N. Star Hospitality Inc., 777 F.3d 898, 904 (7th Cir. 2015).

    69 Branham, WL 3230310, at *5.

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