Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages

Transcription

1 Tyler J. Bowles Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages. Journal of Legal Economics 15(1): pp Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages Tyler J. Bowles, Utah State University * For additional information see Author Contact page Abstract There may be a perception among some forensic economists that the time horizon for future damages in employment discrimination cases is the period the plaintiff would have remained employed with the defendant employer but for the discrimination. While the discrimination acts and interpretive case law concerning damages are nuanced as a result of the rather archaic distinction between equitable and legal remedies, it is clear that the law recognizes that discriminatory acts may injure an individual s earning capacity. Therefore, the law allows for the equitable relief of front pay and the distinct legal remedy of compensatory damages in the form of future lost earnings. While the former contemplates employment with a specific employer (i.e., the defendant), the latter does not. Introduction The important distinction between equitable remedies (e.g., front pay and back pay) and compensatory damages (e.g., future lost earnings) in cases involving employment discrimination has not been addressed in the forensic economics literature. Indeed, some misconceptions related to this issue may have been perpetuated in a special issue of the Journal of Forensic Economics that focused on the issue of Approaches to Damages Measurement in Employment Litigation (See Volume 16, Number 1, Spring- Summer 2003). Tinari (2003) notes that: One of the several ways employment damages calculations differ from damages calculations in personal injury and death cases is that, in wrongful discharge and other employment claims, loss of earnings is attributed solely to employment with the defendant employer (p. 151, emphasis added). * Professor, Department of Economics, Utah State University, Logan, UT. Bowles: Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages 11

2 While this statement may be true for employment cases that are based on contract law, it is not correct for cases arising out of the federal discrimination statutes (i.e., the Civil Rights Act of 1964 as amended by the Civil Rights Act of 1991, hereafter the 1964 Act and the 1991 Act, respectively, or jointly as the Discrimination Acts). White, Abboud, and Holt (2003) also imply that future damages in discrimination cases are limited to the time period during which the plaintiff would have been employed by the defendant employer. In discussing cases involving employment discrimination, they state that The economic losses are based upon the plaintiff s past and future income specific to the employer who committed the alleged discriminatory act (p. 209, emphasis added). This paper discusses the fact that economic damages under the Discrimination Acts are not restricted to the equitable remedies of back pay and front pay, which contemplate employment with the defendant employer; instead economic damages may include the compensatory damage of future lost earnings or earning capacity as generally defined in personal injury litigation. These compensatory damages are not specific to the defendant employer. It is argued, therefore, that the law supports the economic reality that a victim of job discrimination may incur future economic damages independent of the probability of continued employment with the defendant employer. Although much of the discussion that follows is more law than economics, forensic economists working in this area should be aware of the legal issues involved. This paper is organized as follows. In the next section, the legal framework regarding damages in employment discrimination cases is reviewed. Following that, a conceptual model of future damages in discrimination cases is presented and discussed. Finally, the conclusions are summarized. Legal Background The Discrimination Acts make a distinction between legal and equitable remedies. Historically, there was a distinction in England between courts of law and courts of equity. The former provided legal remedies while the latter provided equitable relief. Legal remedies were restricted to land, items of value, or money; equitable remedies generally involved an order by the court requiring the defendant to perform or to refrain from performing some specific act. Although courts of law and equity have merged (see Rule 1 of the Federal Rules of Civil Procedure), the concept of legal versus equitable remedies remains (see Jentz, Clarkson, and Miller, 1987, Journal of Legal Economics 12 Volume 15, Number 1, August 2008, pp

3 pp. 9-10). In the context of discrimination cases, a legal remedy would be a money payment while an equitable remedy would be a court order to reinstate the employee. Under the Civil Rights Act of 1964, only equitable relief in the form of back pay and front pay in lieu of reinstatement were available to victims of discrimination. Although back pay and front pay are, obviously, money payments, conceptually they are substitutes for technically impossible or undesirable court-ordered actions for the defendant to perform. Specifically, it is illogical for the court to order the defendant to go back in time and retroactively hire the plaintiff (or pay her more) during the back-pay period and it may be undesirable for both parties for the court to order the defendant to reinstate the plaintiff. Hence, back pay and front pay are deemed to be forms of equitable relief regardless of the fact they are money payments. The Civil Rights Act of 1991 expanded the types of damages available to include the legal remedy of compensatory damages, which is defined to include future pecuniary losses (Mead 2003). The 1991 Act specifically notes that compensatory damages... shall not include back pay, interest on back pay, or any other type of relief authorized under section 706(g) of the Civil Rights Act of 1964 (Civil Rights Act of 1991, 42 U.S.C. A. 1981a (b)(2)). Importantly, the 1991 Act does not indicate explicitly whether front pay was to remain an element of equitable relief available under the 1964 Act or was now, as a future pecuniary loss, an element of compensatory damages, a legal remedy. This ambiguity would not have been particularly important but for the fact that the 1991 Act imposed caps on compensatory damages. (As compensatory damages were capped, the plaintiff s bar argued that front pay was not an element of compensatory damages but rather an element of equitable relief; the defense bar argued the alternative.) Therefore, the issue of the proper classification of front pay was litigated extensively and a conflict developed among the federal circuits. The United States Supreme Court took up the issue in Pollard v. E.I. du Pont de Nemours & Co. (2001). Here the Court noted that: Although courts have defined front pay in numerous ways, front pay is simply money awarded for lost compensation during the period between judgment and reinstatement or in lieu of reinstatement (p. 846). The Court states further that... front pay is not an element of Bowles: Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages 13

4 compensatory damages within the meaning of 1981a... (p. 848). Given the concept of equitable relief and the U.S. Supreme Court s definition of front pay (i.e., lost compensation during the period between judgment and reinstatement or in lieu of reinstatement) and the determination that front pay is equitable relief, it is clear that front pay contemplates future employment, but for the discrimination, with the defendant employer. Therefore, front pay damages are restricted to the future earnings the plaintiff would have earned from the defendant employer less mitigating earnings. But what about compensatory damages as added by the Civil Rights Act of 1991? In commenting on its opinion that front pay is not an element of compensatory damages, the U.S. Supreme Court cited Williams v. Pharmacia (1998) and the Williams Court s language that front pay is the functional equivalent of reinstatement... (Pollard v. E.I. du Pont, p. 853). The Williams Court also provides insight on the central issue of this paper. Specifically, can front pay be distinguished from future lost earnings? The defendant-appellant, Pharmacia, argued that the district court erred in awarding front pay in addition to the jury awarding lost future earnings. The Seventh Circuit affirmed the district court s decision. The Williams Court s language is instructive and is here quoted at length: An award of lost future earnings is a common-law tort remedy.... Williams expert witness testified that the poor evaluations Williams received and Pharmacia s eventual termination of her employment taint Williams employment record. The jury was entitled to rely on this testimony in finding that Pharmacia s acts of discrimination diminish Williams future earning capacity in the same way that a physical injury may diminish the earning capacity of a manual laborer (p. 952). Pharmacia argues that the front pay award and the lost future earnings award are duplicative and therefore over compensatory. As we have explained, however, the two awards compensate the plaintiff for different injuries. Front pay in this case compensated Williams for the immediate effects of Pharmacia s unlawful termination of her unemployment. The front pay award approximated the benefit Williams would have received had she been able to return to her old job. The district court appropriately limited the duration of Williams Journal of Legal Economics 14 Volume 15, Number 1, August 2008, pp

5 front pay award to one year because she would have lost her position by that time in any event because of the merger with Upjohn. The lost future earnings award, in contrast, compensates Williams for a lifetime of diminished earnings resulting from the reputational harms she suffered as a result of Pharmacia s discrimination (p. 953). This analysis by the Seventh Circuit Court is consistent with the economic reality that damages in the form of lost earnings may continue into the future and involve potential jobs with other employers, as was argued in Williams v. Pharmacia. There probably are some discrimination cases where the facts support the conclusion that the plaintiff s earning capacity has been diminished by the discriminatory act (see Shahnasarian, 2003). In this instance, there is no reason to arbitrarily restrict the time horizon for future damages to the period the plaintiff would have remained employed by the defendant. In order to develop this point further, a more formal model is presented below. Economic Analysis Based on the above discussion, the following is a conceptual model of future economic losses in a discrimination case: or future economic loss = front pay + future lost earnings (1) future economic loss = n1 n2 ( E A) d + ( E A) d i i i i i i i1 i= n1+ 1 where n 1 = number of future years the plaintiff would have been expected to work for the defendant employer where the term future has reference to the post-judgment period; n 2 = worklife expectancy of plaintiff at time of judgment; E i for i = 1, 2,..., n 1 = plaintiff s expected earnings from the defendant employer during period i had the plaintiff been reinstated; A i = plaintiff s alternative (i.e., mitigating) earnings during period i; E i for i = n 1 + 1, n 1 + 2,..., n 2 = plaintiff s expected earnings during each period i but for discrimination; and d i = appropriate discount factor for period i. Bowles: Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages 15

6 In the context of this model, it is clear that two facts are necessary to support a damage claim for front pay: n 1 > 0 and E i > A i for some i. The values of n 1, E i and A i depend, obviously, upon the facts of the case. It should be noted that labor market theory suggests that, as a general principle, E i (i = 1, 2,..., n 1 ) = E i (i = n 1 + 1, n 1 + 2,..., n 2 ) = A i (for all i) except for the effect of time. However, it is possible that due to the specific nature of some labor markets, a given employer in this case the defendant employer may have been paying a higher wage to the plaintiff than what he or she could expect to have been paid by any alternative employer. (Akerloff and Yellin (1986) provide an explanation of why some firms rationally may choose to pay a wage above the market clearing price and of the empirical fact that considerable wage variability exists for a given type of job.) Another possibility pointed out by Shahnasarian (2003) is that... a less than harmonious ending of an employment relationship can stigmatize an individual among peers and employers (p. 180). Moreover he notes that In some cases, the psychological impact of a workplace impropriety vis à vis harassment, discrimination, or wrongful termination casts longstanding, profound implications on future career development and earnings (p. 180). In this case E i > A i and front pay is appropriate, assuming n 1 > 0. Only one fact is necessary, assuming liability, to support a claim for future lost earnings: E i > A i for some i. The fact that n 1 = 0 does not preclude a damage claim for lost future earnings although it would preclude a claim for front pay. To illustrate this point, assume a case where the plaintiff is an employee at will. The defendant reasonably may argue that front pay, the functional equivalent of reinstatement, should account for the fact that the defendant had the right to terminate the plaintiff for any nondiscriminatory reasons or for no reason at all. This is an odd but logically consistent argument: Yes, we terminated her for discriminatory reasons but front pay should be zero because we will terminate her for reasons other than discrimination immediately after being ordered to reinstate her. While not made in such an explicit fashion, the author has heard this argument made in discrimination cases. This argument, however, cannot be made to reduce the compensatory damage of lost future earnings. The different damage concepts in discrimination cases and the associated nuances often require more sophisticated analysis and testimony by the forensic economist than in the typical injury case. While front pay and compensatory damages are distinct concepts, it is easy to fall into the trap of double counting. To complicate matters, front pay is determined by a judge after, generally, compensatory damages have been determined by a jury (see, for example, Wade v. Transit Authority, 2006). In Williams v. Phar- Journal of Legal Economics 16 Volume 15, Number 1, August 2008, pp

7 macia, the court cautions district courts... to be vigilant to ensure that their damage inquiries are appropriately combined to protect against confusion and potential overcompensation of plaintiffs (p. 954). (Also see Nelson v. Rehabilitation Enterprises of North Eastern Wyoming (1997)). Clearly, a forensic economist who is aware of these issues can be of great value to the court in properly assessing damages and presenting testimony. As an example, consider the following hypothetical case study. The assumed facts are as follows: 1. Plaintiff, Jim, is a 55-year-old high school teacher with tenure who was terminated by school district A in violation of the American with Disabilities Act. 2. School district A has never terminated a tenured teacher for cause; % of teachers in this district take early retirement at age At the time of his termination, Jim has a work life expectancy of eight years. 5. Jim s salary and wages at the time of his termination were $72,000 and he was at the top of the salary schedule. 6. His most reasonable alternative wage is working in a cabinet manufacturing shop at an annual wage of $38,000 but with no benefits. To focus on the main points, assume the trial takes place the day he was terminated and ignore wage growth rates, discounting issues, and tax issues. District A could reinstate Jim and he could continue to work for the district for the three years remaining before taking early retirement. In lieu of restatement, damages would be calculated according to equation (1) as follows: (2) future economic loss = (3 years)($72,000 - $38,000) + (5 years)($38,000 - $38,000) $102,000 = $102,000 + $0 In this instance, Jim s damages include front pay but no compensatory damages in the form of future lost earnings. Assume, alternatively, that Jim demonstrates that he would have taken early retirement with district A at age 58 but could have taken a teaching job in another state with school district B with wages and benefits at $65,000. Further assume he demonstrates that this unique opportunity Bowles: Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages 17

8 with district B has been foreclosed to him because of his termination from district A and that now his next best alternative is the cabinet shop. With this set of facts, damages become (3) future economic loss = (3 years)($72,000 - $38,000) + (5 years)($65,000 - $38,000) $237,000 = $102,000 + $135,000 Here, his losses include future lost earnings since, by assumption, the act of termination decreased his earning capacity in the period extending beyond his projected employment with the defendant. Finally, assume the same initial facts from above but that district A demonstrates that Jim would have taken early retirement at age 56 rather than 58 and that Jim takes a job with district B the day after he was terminated by district A. Given these facts, losses are calculated as follows: (4) future economic loss = (1 year)($72,000 - $65,000) + (7 years)($65,000 - $65,000) Summary $7,000 = $7,000 + $0 There may be a perception among some forensic economists that the time horizon for future lost wages and benefits in employment discrimination cases is the period the plaintiff would have remained employed with the defendant employer but for the discrimination. While the discrimination acts and interpretive case law concerning damages are nuanced as a result of the rather archaic distinction between equitable and legal remedies, it is clear that the law recognizes that discriminatory acts may injure an individual s earning capacity. Therefore, the law allows for the equitable relief of back pay and front pay and the distinct legal remedy of compensatory damages in the form of future lost earnings. While the former contemplates employment with the defendant-employer, the latter does not. Journal of Legal Economics 18 Volume 15, Number 1, August 2008, pp

9 References Akerloff, George A., and Janet L. Yellen, eds., Efficiency Wage Models of the Labor Market. Cambridge: Cambridge University Press. Jentz, Gaylord A., Kenneth W. Clarkson, and Roger LeRoy Miller, West s Business Law: Alternative UCC Comprehensive Edition, 3 rd. New York: West Publishing Company. Mead, Marisa J., Taxing the victims: compensatory damage awards and attorneys fees in sexual harassment lawsuits, Journal of Law and Policy, 11: Shahnasarian, Michael, Front pay damage assessment: a summary of vocational and psychological considerations, Journal of Forensic Economics, 16(1): Tinari, Frank D., Approaches to damages measurement in employment litigation: an introduction, Journal of Forensic Economics, 16(1): White, Paul F., Josefina V. Abboud, and Fredrick M. Holt, The use of attrition rates for economic loss calculations in employment discrimination cases. A hypothetical study, Journal of Forensic Economics, 16(1), Federal Code and Court Rules Civil Rights Act of 1964, 42 U.S.C. 2000e (2006). Civil Rights Act of 1991, 42 U.S.C. 1981(a) (2006). Federal Rules of Civil Procedure, 2006, R1. Small Business Job protection Act of 1996, Public Law No , 110 Stat (1996). Case Law Pollard v. E. I. du Pont de Nemours & Co. v. 532 U.S. 843 (2001). Bowles: Employment Discrimination: Distinguishing Between Equitable Remedies and Compensatory Damages 19

10 Williams v. Pharmacia, Inc. 137 F.3d 944 (1998). Wade v. Transit Authority 2006 U.S. Dist. Lexis (2006). Nelson v. Rehabilitation Enterprises of North Eastern Wyoming 124 F.3d 217 (1997). Journal of Legal Economics 20 Volume 15, Number 1, August 2008, pp