Why Include Fringe Benefits in Loss Estimates?

Excerpt from Chapter 4: Fringe Benefits

Economic/Hedonic Damages: The Practice Book for Plaintiff and Defense Attorneys
by Michael L. Brookshire and Stan V. Smith

Several theoretical bases exist for including employer contributions to fringe benefits in estimates of the earning capacity, and therefore of the lost earning capacity, of individuals rendered incapable of work.

Fringe Benefits: Market Theory

The first might be called the “Market Theory” of fringe benefit loss.

Earning capacity of an individual is, indeed, his capacity to earn some total of compensation in any time period, and it is the labor market, of employers and potential employees, which sets the value of this earning capacity.

In the extreme, an employer could not hire an adequate quantity or quality of labor by simply paying competitive wages but no fringe benefits. With relevant fringes, for our purposes, around one-fourth of wages, employers must also pay substantial fringe benefits to attract and retain workers.

Employers don’t do this as a matter of charity or goodwill. They do so because they must.

The market demands it, and the marketplace thereby sets the total earning capacity of any individual.

Fringe Benefits: Replacement Theory

A second basis for including fringe benefits in loss estimates is the “Replacement Theory.”

Assume that a worker had been receiving employer-provided health insurance and pension contributions, for example. If the employee now cannot work, he and/or his family must replace these benefits at a comparable level in order to be made whole. The measure of damage would then be the cost of a replacement health insurance and pension plan purchased by the former employee and/or his family.

As will be seen, loss estimates may differ according to whether a market or a replacement theory is emphasized. Both may be employed in individual fringe benefit category, in order to avoid double-counting.

A third reason why fringe benefits should be included in earning capacity estimates is that, within limits, direct compensation and fringe benefit compensation are interchangeable.

Employees—particularly those represented by labor unions—have some influence over how any increase in total compensation will be split between increased direct payments and increased fringe benefits provided in whole or in part by the employer.

Companies A and B may provide exactly the same total compensation to a particular type of worker, but employer contributions to fringe benefits might be 30 percent of total compensation in Company A and only 20 percent in Company B. The dead or injured former employee of Company A must have his fringes valued in full as lost earning capacity is estimated.

Otherwise, he will be cheated vis-à-vis the same type of worker in Company B simply because he, his former employer, and/or his labor union desired a greater fraction of total compensation in fringe benefits.

Finally, employer-provided fringe benefits should be included in lost earning capacity estimates because this element of loss does not double-count with any other elements of loss if the estimate is properly made.

Several types of fringes provide benefits only if a given event occurs. One receives disability benefits if disabled, life insurance if death occurs, workers’ compensation if injured on the job, and unemployment compensation if unemployed.

Normally, each of these types of benefits is valued as the amount of employer contributions going into an insurance fund or pool, rather than as the amount of benefits to be drawn out if the deleterious event occurs.

This is done primarily for simplicity.

It will be remembered that under the Life-Participation-Employment approach to work-life expectancy, wage estimates were lowered in each year by the probability that these same events might occur.

Thus, it is entirely appropriate to add back a value for any employer-provided benefit which would be available when and if such events as injury, sickness, disability, unemployment, or death happen.

On the other hand, if a wage estimate assumes a greater-than-average probability of life, labor force participation, or employment at any age, and if such fringes as unemployment compensation, workers’ compensation, and disability insurance are also being added in at that age, then it can be argued that the estimate does involve double-counting.

It does not seem logical or consistent to add a value for disability or unemployment in a given year if, in the wage estimate, one has assumed a 100 percent probability of labor force participation and continuous employment in that year.

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