Valuing Lost Employment Income – Don’t Forget to Include Employer-Sponsored Benefits!
The value of employer-sponsored benefits (health, dental, disability, pension, etc) often forms a significant part of a person’s ‘income’ from employment, especially when a pension plan is available. Therefore, the loss of these benefits will often form a significant part of the economic loss quantification for an injured party, especially if the person is unable to return to any gainful employment, and thus no longer has these benefits available to them.
For the purpose of this article, we are concerned mainly with the difficulties in valuing employer-sponsored benefits that are not ‘paid’ to the employee, such as health, dental, life, and disability. Benefits such as statutory holiday pay and vacation pay are generally paid to the employee and are included in their salary or wage. Bonuses can also often form a significant part of a person’s earnings. However, these amounts are also generally ‘paid’ to the employee and, thus, are included in their earnings. Lost pension benefits (whether a defined contribution plan, or a defined benefit plan) often form the largest portion of the value of lost employer-sponsored benefits. Although they are not paid to the employee, there is generally sufficient information and documentation available to us, to enable us to value the lost pension benefit amount.
However, employer-sponsored benefits, such as health, dental, life, and disability premiums, are not paid to the employee, and often the employer’s cost of providing these benefits is not available to us.
In determining a person’s income from employment, either for purposes of calculating a loss due to injury, or for IRB (Income Replacement Benefit) purposes, the value, or the employer’s cost, of providing these benefits, should be added to a person’s salary or wages that they earned. Unfortunately, as noted above, the actual cost to the employer of providing these benefits (i.e. health, dental, disability, life) is generally not available to us. As such, calculating the loss of these benefits can present some significant challenges. We often need to rely on statistical data in our calculations.
The following are four important questions to consider when valuing the employer’s cost of lost benefits:
- What benefit coverage was available to the employee?
Most full-time employees and some part-time employees are entitled to some employer-sponsored benefit coverage. A copy of the benefit booklet detailing all of the benefits available to the person should be obtained. The booklet may indicate that some benefit coverage may be mandatory and some may be optional. If so, it is important to obtain details of the coverage that the employee elected. This information should be included in the employment file.
- What benefits, if any, have been lost?
Information should be obtained from the employee, the employer, or the insurance company detailing what, if any, benefits have been terminated as a result of the employee’s inability to continue working. Confirmation of the termination date of the benefits is also important. If the insured is receiving disability benefits, they often continue to be covered under the employer’s benefit plan and thus no loss of benefits may have been suffered. However, if there is a concern that the disability coverage will be terminated at some point in the future, there may be a future loss of benefits. The short-term disability (STD) and long-term disability (LTD) files should be requested from the insurer as they often contain information regarding the status of the employer-sponsored benefits.
- Who was paying for the lost benefits?
It is important to determine if the employer, the employee, or some combination of both paid for the cost of the benefits. Only the portion of the benefits that were paid for by the employer should be included in the loss calculation. The benefit booklet should detail who is responsible for paying for the benefits. In addition, a review of the employee’s pay stubs, if available, should show if the cost of any benefits are being deducted from their gross pay.
- What is the employer’s cost of the benefits?
Generally, it is often difficult to obtain the employer’s cost of providing the benefits to the employee. Occasionally the benefit booklet, or paystubs may include costs. However, confirmation from the employer will usually be required. If this information cannot be obtained, then an alternative would be to use statistical information, such as the KPMG 1998 Survey of Employee Benefit Costs in Canada, which breaks down the cost of various employer-sponsored benefits by employment sector as a percentage of gross annual payroll. In many situations, such as when the injured party was a young child or student, they would not have any work history. Therefore, using statistical data would be appropriate to estimate future lost employer-sponsored benefits in those situations.
Ultimately, calculating the value of lost employer-sponsored benefits for economic loss or IRB purposes is a complicated issue with each case presenting its own set of unique challenges. 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.