economic damages from wrongful termination

Employers do not always need to provide a good reason for terminating their employees. However, in situations wherein terminated employees believe that their dismissal is not related to poor work performance (even if poor performance is, in fact, the reason for termination), or believe their dismissal is not justified by any other legitimate reason, companies may find themselves embroiled in wrongful termination suits.

Irrespective of the exact reason termination occurs, it is expected that former employees will experience some period of economic loss prior to finding a new job. However, even after finding a new job, dismissed employees might not be able to earn the same salary as in their previous position. In certain situations, former employers may be required to provide compensation for economic damages.

What are economic damages?

The remedy for wrongfully terminating an employee is typically for the company that terminated them to provide financial compensation for the losses the employee has faced, known as economic damages.

Many factors go into determining what economic damages result from wrongful termination, and they may vary substantially based on the specifics of the situation. Economic consultants are frequently sought out to help calculate economic damages that have occurred after a wrongful termination. Labor economists play an important part in wrongful termination cases, and their input on these matters can greatly affect the outcome.

How are lost earnings calculated?

The economic damages that occur from a wrongful termination are a total of lost earnings and benefits resulting from dismissal from the former job. Economic damages will vary depending on the amount of time the former employee remains unemployed after having been dismissed. Any calculation of wrongful termination damages will also need to factor in wage and benefit compensation differences between any new and former employment; this is true for back pay and front pay.

What is the difference between back pay and front pay?

Back pay refers to the amount of money that the employee would have been expected to make – in other words, their lost net earnings – from the date they were terminated up until the day the trial begins.  Determining the amount of a person’s back pay can be accomplished by providing documentation of their previous earnings in the position, including any benefits or bonuses they might have received, as compared with the same measures following re-employment with a new position. 

Front pay is intended to provide compensation on par with what an employee could have expected to receive had their employment never been terminated.  After being let go, it can take a significant amount of time for an individual to make earnings comparable to those in their old position. Unlike back pay, front pay provides compensation until a set point in the future – not only up to the day of the trial. This is done when reinstatement is not an option, which could be the case for a number of reasons.

Determining front pay can be difficult, as it requires economists to determine when the employee would realistically be at the same level they were before they were terminated. In some cases, economists may be asked to provide testimony about when re-employment could have been expected (assuming the employee claimed he or she was unable to find another job); labor economists with knowledge of local labor market openings can provide such estimates. This is especially true when there is evidence that the terminated employee has not made a reasonable attempt to secure a job after termination.

Is there any compensation for fringe benefits lost in wrongful termination?

In many termination situations, a person’s wages are not the only economic loss they might have experienced. The loss of benefits from their termination must also be determined to accurately calculate the full extent of economic damages. For many, these benefits include medical coverage provided by their employer. Some companies might also offer benefits such as stock options, transportation reimbursement, or participation in a retirement plan. The total value of the benefits a person receives from their employer can be significant, so it’s important that these are taken into consideration when determining economic damages. After the employee secures a new job following termination, the benefits from this new job must also be accounted for, in order to accurately determine the difference in the value of benefits between the former and current job.

What efforts does a terminated employee need to make to mitigate loss?

The natural step to take after losing a job is to find a new one as quickly as possible, and it’s also expected that someone who has been wrongfully terminated will earnestly attempt to find new sources of employment. After being terminated, employees do have a duty to mitigate the damages they might have faced. Should the case come to litigation, the individual claiming wrongful termination must be able to prove that they made significant efforts to find a new, comparable job for themselves, and not passed up available job opportunities.

What if those efforts are insufficient?

When a terminated employee fails to make adequate efforts to find a new job, the defendant in such a case may be able to show that no significant attempts to secure a new job were made, and that this inaction has led to more significant economic damages than the actual termination. In these situations, the blame for these financial losses cannot be placed squarely on the former employer.  In order to show this, defendants may gather information regarding similar jobs in the same geographic location, to which the former employee could have applied, but for whatever reason failed to do so.

If the employee has already been hired for a similar job, the amount they are owed in back pay can also change depending on their new wages. In some events, a person might take a new job after they were wrongfully terminated where the pay is greater than what they had previously earned. If the employee makes more in their new job, these wages can be used to offset what their former employer would have been owed in back pay.

How has the COVID-19 pandemic led to wrongful termination cases?

During the pandemic, individuals have been terminated from their jobs due to employer financial troubles leading to reduction in force, internal restructuring, and other company-wide changes. These large-scale downsizing efforts have sometimes led to cases wherein the validity of an employee’s (or groups of employees’) dismissal from work is in question.

While there are legitimate reasons for laying off employees during the pandemic, there are several reasons that may constitute grounds for wrongful termination lawsuits. These include situations in which individuals were terminated for taking medical leave, bringing up or complaining about COVID-19 safety concerns in the workplace, and obeying shelter-in-place orders that rendered in-person work impossible.

Employers that have implemented or intend to implement a large-scale reduction in force during the pandemic, or even to dismiss a smaller number of employees, would be well-advised to conduct a proactive analysis to ensure that these layoffs are not vulnerable to charges of wrongful termination. If findings indicate a problem, it may be beneficial to work with economic consultants to accurately determine what economic damages may result, if wrongful termination suits arise – and work to mitigate these damages in advance.

Labor Economist Consulting Services

Determining economic damages from wrongful termination requires close attention to detail to carefully analyze all data involved. Welch Consulting has significant experience in economic damage analysis, as well as in litigation in this area, wherein we regularly serve as economic expert witnesses. With the help of experienced labor economists and consultants, economic damages can be accurately calculated using data that serves as critical evidence in these cases.

Economic damages cases can be stressful, complicated, and expensive. Working with economic experts can have a considerable impact on the outcome of a wrongful termination suit. We encourage you to get in contact with us if you think we can work together.




G. Edward (Ted) Anderson is a Senior Economist and Principal of Welch Consulting, located in the Los Angeles, California office.



The opinions expressed are those of the author(s) and do not necessarily reflect the views of our firm or its clients.