Loss of Earning Capacity

Posted on November 9th, 2022 in Loss Quantification

woman injured sitting in the ground after a car accident

When a person has been injured, they can often recover damages from the person responsible for causing their injuries. One head of damages to be considered is the past and future loss of employment (or self-employment) income that the person has, or will, suffer due to their injuries.

We generally try to approach these calculations by determining what the person’s income would have been, if not for their injuries, and compare that to what their income will now be (if any), given their injuries. For example, if it is assumed that the person, who was working full-time, will now be able to work only 15 to 20 hours per week (or perhaps 2 to 3 shifts per week) because of their injuries, we may calculate the person’s future loss to be one-half (or other appropriate percentage) of their previous full-time earnings. It is generally preferably to tie these assumptions, as closely as possible, to medical evidence and/or actual postaccident performance.

However, sometimes the extent of the person’s injuries, and how it will affect their future earning potential, is not yet known. The person may have currently returned to full-time employment, but, due to their injuries there may be concern that the person will not be able to continue in that full-time employment in the future, that they may be out of the workforce from time to time, or that they may have lost opportunities to pursue certain work. This is often referred to as a loss of competitive advantage, or loss of earning capacity.

In this regard we note that, based on Statistics Canada data, a partially disabled worker is generally:

More likely to be unemployed at any point in time;
Less likely to participate in the work force;
Likely to earn less than people without disabilities who have similar qualifications;
More likely to work on a part-time basis, due to their disability; and
Likely to face an increased risk of being forced to leave the workforce early.

Advancing a claim for a loss of earning capacity is a legal issue, however, we note that there are many cases supporting the calculation of such loss. For example, Belton v. Spencer, 2021 ONSC 2029 (CanLII) dated March 23, 2021, states:

“In Canada, an award for future loss of income compensates the plaintiff for his or her loss of earning capacity – in other words, the loss of an asset, the capacity to earn.”
“Whereas compensation for past loss of earning capacity is based on what the plaintiff would have, not could have, earned but for the injuries he sustained, a plaintiff who seeks compensation for future loss of earning capacity need not prove that it will be lost or diminished on a balance of probabilities. The plaintiff need only establish that his loss was a real and substantial possibility because of the injuries he sustained.”
“The plaintiff is entitled to compensation for loss of earning capacity to recognize the likelihood that there may indeed be positions in the future which the plaintiff might otherwise have had an opportunity to obtain but which will not be feasible for him in light of the continuing symptoms from his injuries.”

In cases where the extent of the effect of the person’s injuries on their future earning potential is not yet known, we often refer to statistical data regarding the ‘wage gap’ between people with disability and those without.

Over the years, Statistics Canada has conducted various surveys on disability and activity limitations, the most recent being the 2001 and 2006 Participation and Activity Limitation Surveys (PALS), and the 2012 and 2017 Canadian Surveys on Disability (CSD).

According to studies done using this data, the wage deficit for a male with a ‘mild’ disability is about 8% to 16% of that of a male without a disability. That is, on average, over the working life of the individual, a male with a mild disability will earn about 84% to 92% of a male without a disability. The wage gap for a female with a mild disability is between 9% and 21% over their working life. Similar data is also available for people with a ‘moderate’, ‘severe’, or ‘very severe’ disability.

To estimate a person’s loss of future employment income, we can apply these percentages against the average earnings for their anticipated occupation. For example, if a person without a disability would be expected to earn $50,000 per year in a specific occupation, the loss for a male with a mild disability working in that occupation could be estimated to be between $4,000 and $8,000 (8% to 16% of $50,000) per year.

We note that there are cases that specifically support the use of PALS/ CSD data to calculate a loss of earning capacity (although the calculations can be further adjusted based on specific circumstances). Other cases support use of a percentage, but do not specifically refer to PALS/CSD. A review of such cases indicates that it is important to try to tie the loss to the specific circumstances of the individual, including medical evidence available, as noted earlier.

Of course, each situation should be considered based on the specific background and circumstances in that case. Ultimately, calculating an economic loss is a complicated process with each case presenting its own set of unique issues. Our Financial Services Advisory Team (FSAT) has significant experience preparing these calculations. If you have any questions or require assistance with a calculation, please contact a member of our team.

Article originally published in: FSAT News: Fall/Winter 2022