Fired but Not Forgotten: How To Calculate Back Pay

Posted June 2nd, 2016.

Categories: Employment Law, The Calculating Lawyer.

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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 he/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.

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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.

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The 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.

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Most 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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