What Is Your Earning Capacity?

The Firm, P.C. is a boutique Las Vegas law firm founded by Preston Rezaee, Esq. Preston Rezaee is also the founder and Editor in Chief of Vegas Legal Magazine.

In Nevada courts, personal injury attorneys frequently ask juries to assess the loss of earnings capacity for a plaintiff that has been injured or killed; however, this is not an easy assessment because one’s past earnings are not necessarily a guide. For example, what if the plaintiff was only 13 years old (or 13 months old), had no prior earnings history, and an incomplete education (or none at all)? And what of tech masterminds like Steve Jobs and Michael Dell…two men who didn’t finish college yet whose future earnings would’ve been hard to fathom when they left school? Or imagine if Bill Gates had sustained a fatal injury during his sophomore year at Harvard?

These are complicated situations, but they illuminate the difficult job of a jury to place a value on potential earnings in wrongful death and personal injury claims when measurable values are moving targets. How do juries approach it ? A forensic economic evaluation may illustrate various future realistic scenarios for their consideration. But before that evaluation, it’s important to understand and distinguish between earnings capacity and expected earnings.

Actual, Expected and Capacity Earnings: Learning The Difference

In Nevada (as in most states), “earnings capacity” is the measure of loss. In your past, you may not have earned as much as you were capable of earning, but Nevada allows you to claim what you were capable of earning. Imagine a villager who has a 10-gallon jug who goes to the river daily to fill it with only seven gallons, since that’s all her family needs. If someone breaks the villager’s jug, what size jug should replace it…a seven-gallon jug since that was the average amount carried, or a 10-gallon jug, since that is the actual capacity of the broken jug? Nevada allows the claim for a 10-gallon jug replacement since that is the jug’s capacity.

Similarly, a person’s actual earnings, and their earnings capacity, are established in labor markets as a result of supply and demand based on what a person was able and willing to do, and based on employers’ need for that work. In even simpler terms:

• Actual past earnings is based on what a person did earn in the past. We can look a person’s W-2s or social security earnings statements to determine these.

• Expected earnings is based on what a person might be expected to earn in the future and involves the probability that a person would generate earnings.

• Earnings capacity is based on what a person would have been capable of earning….and is different than what a person would have been expected to earn.

Frequently, earnings capacity exceeds expected earnings. Past earnings can be an absolute floor for earnings capacity, but earnings capacity can certainly be much higher than the actual past earnings. And earnings capacity can increase through planned future training and education.

Understanding Earnings Capacity

In order to generate future earnings, a person has to be participating in the labor force, and has to be employed. The labor force (i.e., those participating) includes the employed and the unemployed. Participation means a person is available for work. You can be participating, and yet not employed; yet since you are seeking and hoping to find work, you are in fact participating in the labor force. There are factors that preclude participation. Some of these factors are involuntary, such as injury or illness.

Now: A person is not participating in the labor force if they are sick and cannot work or if they are voluntarily opting out to take time off to care for a newborn or sick family member, or if they’re going back to school for additional education. Bottom line: If you are not available to be employed, you are not participating.

But it gets more nuanced than that… because even if you are participating in the work force, you may not be employed. You may have been laid off, or you quit your job and are seeking another position. Maybe you moved from one state to another, or your employer moved out of state. To generate actual earnings, a person must be participating and must be employed. But having an earnings capacity does not require either participation or employment, in the past or in the future. It requires the capacity to be participating (i.e., not injured) and capacity to work (i.e., with sought after skills). It does not require that we know an actual employer or identify an actual job. It only requires that there are employers and that there are jobs. You can’t have an earnings capacity in the desert.

Underlying Assumptions of Earnings Capacity

Let’s review some examples of how the realistic assumptions of earnings capacity will differ depending on the plaintiff:

If a child is injured, realistic assumptions must be made about the child’s future level of education—which can be influenced by the level of education of the parents, but on average, is greater than their parents’ education. Since the average level of education today for young people who enter the labor force is “some college,” a jury might be shown several education scenarios for an injured child: high school graduate; some college; and college graduate. (Note: If the parents are both college graduates, the likelihood of the child completing college does increase.)

Let’s imagine someone in college. What are the realistic assumptions? College completion? Graduate school? This will depend on the actual testimony of what the plans were prior to the injury. Some people know during their second year in college that they want to become a doctor. Others may not know their future desired occupation until they leave college and work for some time. They may return to graduate school. Plans for young people may not be particularly precise or set in stone, and thus several scenarios are useful.

What about someone early in his or her career in sales, finance or law? Typical entry-level earnings are not a significant factor in determining mid- to late-career earnings. An entry-level college graduate may start out at $40k a year, in a career that may allow them to double or quadruple their earnings between ages 30-40. And these earnings may double or more in the next decade or two, when they are 50-60 years old. Again, a forensic economist can show multiple scenarios that a jury can weigh, along with career plans, employment evaluations, etc.

Preparing Juries To Evaluate Expected Earnings

A jury must be educated to understand that potential or expected earnings are not the same as earnings capacity. Imagine a 55-year-old female attorney who is making $100k annually, with three daughters who are beginning to have children of their own. She may inform her husband, who also makes an excellent living, that she has decided to quit her job, and as grandma, intends to provide care for the grandchildren at her home. This retirement move will allow her daughters to pursue their careers, and it will place the grandchildren in a family environment rather than with strangers at a daycare facility. Were this woman to become injured the day she announces that she will have zero expected earnings in the future, her earnings capacity would still be $100k per year.

In evaluating earnings capacity, for many employed people, the most recent year is their highest year of earnings, as earnings generally increase over time. But sometimes, one past recently high year is not necessarily the best indicator of earnings capacity. Earnings of a real estate agent, for example, can vary depending on economic climate, referrals, etc. Referrals may come in clumps, and the economics conditions may vary. In such a situation, averaging more than one prior year may be a reasonable approach.

Another example regarding earnings capacity that I sometimes share with a jury is that a car’s upper speed limit (its capacity) is much greater than its average speed. In Chicago, I might average 10 miles an hour during the year. But if I were to take my car to a dealer for a trade, I would expect him to consider that it can go 90 miles per hour or more down the freeway (in Montana, legally!) and not offer me the price of a clunker.

Earnings Capacity Outliers

Courts have not given clear guidance on all assumptions about earnings capacity, which has made some assumptions seem unrealistic. For example, anyone could take a second job, part time, and it’s something that is within the capacity of most. Most people don’t exercise that capacity, but if they have in the past, it should certainly be considered. Yet if they haven’t, it may be a stretch to ask a jury to consider that possibility (although it could be shown as an additional scenario if there is some chance it might have happened). Additionally, many people could earn more if they increased their level of education, but again…if they are mid-career, it may be a stretch to consider this to be realistic.

When forensic economic testimony is provided to a jury showing the various alternative earnings capacity scenarios, along with testimony about education and work plans from family members and others, a full and fair recovery can be achieved. The economist can produce information that serves as a tool, an aid and a guide for the jury.

Stan V. Smith, Ph. D., is VLM’s Quarterly Economics Columnist and president of Smith Economics Group, Ltd. Trained at the University of Chicago (one of the world’s pre-eminent institutions for the study of economics and the home of the law and economics movement), Smith has also taught at the university and co-authored the first textbook on the topic of economic damages. A nationally renowned expert in economics who has testified nationwide in personal injury, wrongful death and commercial damages cases, Smith has assisted thousands of law firms in successful results for both plaintiffs and defendants, including the U.S. Department of Justice. Smith also developed the first course in forensic economics at DePaul University, and pioneered the concept of “hedonic damages,” testifying about the topic it in landmark cases. His work has been featured in the ABA Journal, National Law Journal, and on the front page of The Wall Street Journal.

Smith Economics Group, Ltd., is located at 1165 N. Clark Street, Suite 600, Chicago, IL 60610. Dr. Smith may be reached at 312-943-1551 and at Stan@SmithEconomics.com.

The Firm, P.C. is a boutique Las Vegas law firm founded by Preston Rezaee, Esq. Preston Rezaee is also the founder and Editor in Chief of Vegas Legal Magazine.

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