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September 20, 2012

With human capital considered a fundamental element in almost every company's productive efforts, economists are often required to analyze employment data and provide an extensive report on a variety of labor areas. These can include wages, wage inequality and differentials, demand for labor from a macro point of view, micro studies of individuals and their companies, effects of collective bargaining and unemployment, as well as the interaction of labor markets with other markets, (e.g., retail, manufacturing, foreign trade, money). Such economic studies can often become key evidence in many labor and employment disputes - even extending beyond damages modeling to the analysis of overall labor markets, specific industries and geographic locations.

Economists[1] can be used in both single plaintiff employment cases and class action cases. Their primary role in a single-plaintiff case is to determine the amount of economic damages, if any, that have resulted from some alleged harm or improper action (e.g., wrongful termination or discrimination). These economic experts can also provide opinions related to mitigation and the labor market - sometimes being asked to determine if discrimination has occurred. In class action cases, they are not only engaged in the damages phase, but class certification as well.

Single-Plaintiff Cases
Single-plaintiff cases may involve allegations of wrongful termination, such as discrimination (race, gender, age, disability, religion or sexual orientation), harassment or retaliation. These cases can also involve violations of the Equal Pay Act, theft of trade secrets or violation of post-employment restrictions and covenants (e.g., non-competes, non-solicitations).

Damages in single-plaintiff cases appear to be straightforward on the surface. They are equal to the total compensation that would have been earned, absent the employer's allegedly unlawful action minus the income the plaintiff can expect to earn in mitigation.[2] However, as the saying goes, "the devil is in the details" and the same raw data can yield drastically different damages figures depending on the assumptions.

Damages may include some combination of wages or salary, bonuses, commissions, health benefits, profits from stock options, retirement benefits and possible out-of-pocket expenses related to relevant medical costs or costs associated with new employment. They can be composed of past and future damages:

  • Past damages are those that have accumulated from the date of the alleged wrongful act until the present, usually the date of trial[3] or the date through which the plaintiff has or could have fully mitigated his / her damages (whichever comes first).
  • Future damages extend from the date of trial until the date the plaintiff has or could have fully mitigated their damages or until the end of the damages period (e.g., contract term, expected employment period, work-life expectancy, life expectancy, depending on the type of damages being calculated and the nature of the alleged wrongdoing).

There are several components to the damage calculation where the economist may need to make assumptions and / or use data from publicly available sources. These assumptions are not always clearly explained in a written report and often drive the expert's conclusions. For example, in order to determine the damage period, an economist may be required to estimate the period the plaintiff could reasonably be expected to have worked for the defendant.

It is a misconception that future damages necessarily last until the end of the plaintiff's work-life. This ignores the possibility that a plaintiff would exit the workforce altogether, either through decision, death, retirement or disability. It also ignores the possibility that the plaintiff would have changed jobs for reasons unrelated to the allegations in the case. In addition to the common sense notion that the plaintiff may have changed jobs at some point in the future, substantial academic literature on job mobility is available. Further, such an assumption assumes labor markets are far more static than they really are. As such, the economist should consider factors that may impact an employee's duration of employment with the defendant, such as layoffs, industry downturns and competition.

Analyzing the potential for loss mitigation is another example where the economist may have to make assumptions and / or use data from publicly available sources. An employee who has been wrongfully terminated has a duty to mitigate damages through reasonable efforts to achieve other employment. The economist should consider such mitigation when calculating damages. He / she may need to determine the probability that the plaintiff would have found alternative employment and how long it would reasonably have taken. In addition, earnings from alternate employment are projected.

There are some situations where the defendant and / or defense attorneys may not want to have a damages expert testify for fear that the testimony will provide a lower bound of damages and, therefore, suggest that damages do exist. While this is a strategic decision made by the litigator, the downside could be that, if liability is proven at trial, then the only evidence on the record for damages is what the plaintiff provides. If this is a risk the client wishes to take, then the economist's role shifts to solely assisting the attorneys with the critique and cross-examination of plaintiff's witness.

Class Action Cases
Employment class action cases may include wage and hour, Equal Pay Act or discrimination cases. Wage and hour cases include allegations of unpaid overtime, missed meal and rest periods, misclassification (exempt versus non-exempt or independent contractor versus employee), incorrect irregular rate calculation (involving commissions, returns, rounding, grace periods, prevailing rate of pay) and / or off-the-clock work.

An economist can determine whether the extent to which the alleged disparity or violation exists in the proposed class as a whole, is limited to a subgroup of the proposed class or exists to any greater extent in the putative class than in any other unaffected group. These determinations are often made using sophisticated statistical sampling techniques and recognized quantitative variance analytics. Economists need to determine what data is available, as well as understand the causes of any observed variances in the alleged violations.

Wal-Mart vs. Dukes[4] is a landmark case dealing with workers' rights and sexual discrimination against women in the workforce. Plaintiffs sought to represent more than a million women, all of whom had worked at Wal-Mart since December 1998. An initial ruling in favor of class certification in 2004, which survived appeals at several levels in 2007 and 2009, was unanimously overturned by the U.S. Supreme Court in June 2011 on the basis that plaintiffs did not have enough in common to constitute a class. This ruling has made it harder for plaintiffs to bring class action suits, thus making it more likely that plaintiffs will support its class action motions with more rigorous analysis.

Economists perform analyses to determine if the proposed class has experienced adverse disparities in pay, hiring and promotion across the entire organization or workforce. These analyses address the issue of common results across all the class or whether the plaintiffs' claims are typical of the claims of the class they propose to represent.[5] A common analytical problem arises in wage and hour cases when off-the-clock or unpaid work time is alleged because work time that is not paid is unlikely to be recorded. The expert must use non-traditional sources of information, such as data from building access cards that record the date and time the card is used each time an employee enters the building, GPS data from trucks or time records indicating when an employee logged into or off their computer or data from security cameras.

Given the volume of data of time-keeping information that is at issue in wage and hour cases, statistical sampling is often required. If an organization has thousands of employees with daily time entry records over several years or the data is not in electronic format, it may not be reasonable to analyze all the data. In these situations, an economist or statistician is engaged to sample a subset of the data. This sample may be based on locations, time periods or job functions and is used to determine the patterns that exist within the organization or to compute estimated damages. One issue that arises is whether or not the units sampled (such as the particular stores) are representative of the other units that are not included in the sample.

Economists play a significant role in employment litigation matters. Their role varies by the type and facts of the case and can be instrumental in its outcome, so it is important to retain your expert early. Economists' expertise and attention to detail can help throughout the discovery process, which includes any information requests and data collection.


[1] A reference to economists specifically, but note that accountants, statisticians and other financial experts are also used in employment litigation matters.

[2] Damages are equal to the present value of this difference.

[3] Some experts calculate past damages through the date of the expert report and then provide an update at the time of trial.

[4] Wal-Mart Stores, Inc. v. Betty Dukes, et al. (Supreme Court Case Number 04-16688, 04-16720).

[5] Standard class certification requirements include typicality, numerosity, commonality and adequacy of representation.