Quantifying Damages – Assessing Personal Income of Employed Individuals

Quantifying Damages - Assessing Personal Income of Employed Individuals

In assessing income for personal injury matters, it is typically more difficult to project the economic loss of a self-employed individual. However, compensation packages for employed individuals can be quite complex. Without properly identifying and interpreting the details of an employee’s compensation, a claim for loss of employment income may be overstated or understated.

This post will address the documents that assist with determining total compensation of an employed individual and some things to keep in mind when interpreting the numbers on a statement of earnings and personal tax returns.

Employment Income Documents

Quantifying Damages - Assessing Personal Income of Employed Individuals

To understand the complete picture of an employee’s compensation, there are several documents to request in addition to the individual’s income tax returns:

* Offer of Employment: An offer of employment will set out the specific elements of an employee’s compensation package. For example, consider an employee that must relocate to a new city for an employment opportunity. The offer of employment can include a relocation allowance and a housing allowance. A housing allowance could be a one-time lump sum payment, a monthly allowance, or a combination of both.

* Statements of Earnings: Annual statements of earnings (or pay stubs) detail the exact amounts of employment income that an employee has received including regular salary, overtime pay (if applicable), performance bonuses, relocation and housing allowances, and other items including vacation payouts. It is important to understand that some employment income may not be recurring (housing and relocation allowances). If the one-time amounts are interpreted as ongoing income, the calculation of projected earnings will be overstated.

* Collective Bargaining Agreement: The Collective Bargaining Agreement will set out and specify details related to a pension plan, employee benefits, and salary increases during the years of the agreement. It is important to obtain the agreements for the relevant years that the economic loss is being calculated. The bargaining agreement will also specify the amount of union dues and pension contributions that an employee must make. These are usually a percentage of gross annual salary. The bargaining agreement may also include a salary grid that specifies annual salary based on title and seniority.

* Benefits Booklet: An employee’s benefits will be set out in the employee benefits booklet. Important items include the amount of short-term disability benefits (eg. 100% of gross pay for a number of weeks then moving to 70% of gross pay) and long-term disability benefits. Short-term disability benefits are usually considered to be taxable while long-term disability benefits may be taxable or non-taxable. Other considerations regarding long-term disability benefits include whether they are indexed for inflation and the length of time an employee may receive LTDs (ie. to age 65).

* Annual Pension Statement: The annual pension statement will indicate important dates including (a) first date of pension credit, (b) pension credits accumulated at the present date, and (c) early retirement date (with unreduced pension) and regular retirement date. Many pension plans include an option for an employee to retire before the age of 65.

Things to Keep in Mind

Quantifying Damages - Assessing Personal Income of Employed Individuals

* Union Dues and Pension Contributions: An individual’s T1 Personal Income Tax Return or Tax Return Summary will include a line for union dues and pension contributions. These amounts should be deducted from the T4 salary to determine an individual’s ‘true’ annual gross income. This deduction is important because the benefit of the annual pension contributions will be realized in the post-retirement period. If the contributions are not deducted from the individual’s gross income the benefit of the pension is essentially ‘double counted’ and as a consequence a damages calculation will overstate the individual’s economic loss.

* Taxable or Non-Taxable Benefits: It is important to determine if employee benefits – whether they are part of a dental or health package, collateral benefits (Short-term or Long-term disability), or housing allowance – are taxable or non-taxable. Dental and health benefits are often a combination of employer paid (taxable) and employee paid (non-taxable). It is important to understand what percentage of the benefits are employer paid. Otherwise a calculation of annual benefits may understate the value.

* Vacation Pay and Sick Pay: Tax returns will include vacation payout as T4 employment income. Often when an employee officially moves to an employer’s disability plan, the last paycheck before moving to the disability plan will include vacation payout for unused vacation days. This amount will result in a higher paycheck than usual. The employee may also receive a lump sum for unused sick days. Some unions provide their employees with a very high number of annual sick days so this lump sum payout can easily be in the 4 figures of 5 figures.

* Disability Payments: When an employee receives short-term disability payments, they are often included as employment income on a statement of earnings. The amounts for STD benefits must be separated from actual gross earnings as STD benefits are considered a collateral benefit.