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Loss of earnings – an overview of practical considerations

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Loss of earnings – an overview of practical considerations

A Claimant with a successful personal injury claim is entitled to recover their reasonable losses incurred as a result of the accident, including any past and/or future loss of earnings.

As with any head of loss, the onus is on the Claimant to prove the loss on the balance of probabilities, including the amount of the loss and that it was caused by the accident.

Past loss of earnings

Past losses include any financial losses incurred from the date of the accident to the date that the claim is concluded (either by way of a settlement between the parties or a judgment following a trial at Court). This includes past loss of earnings incurred during any period that the Claimant was off work as a result of the injury and any period of working part-time, such as a phased return.

Past loss of earnings is typically calculated by obtaining wage slips pre-dating (often for a period of at least three months or 13 weeks) and post-dating the accident, calculating the average net monthly wage prior to the accident and deducting the net monthly wage following the accident to provide a net loss.

In principle, Defendants can challenge whether some or all past loss of earnings are caused by the accident or some other factor (such as a change in working practices in the industry, the pandemic or a change in lifestyle choice or outlook on the part of the Claimant following the accident etc.)

Where a Claimant is seriously injured and hospitalised for a lengthy period, it might be relatively straightforward to establish that loss of earnings incurred during the period of hospitalisation and potentially following discharge was caused by the accident.

Future loss of earnings

Future losses comprise losses that the Claimant is likely to incur following conclusion of their claim for the rest of their life (or, in the case of loss of earnings, the remainder of their working life) as a result of the injury.

When calculating future losses, it is the role of lawyers to predict (based on evidence, including expert medical and non-medical evidence and witness statements) what the future will hold for a Claimant, including whether, and the extent to which, they will be capable of paid employment in future. To the extent that the Claimant will not earn the same in future as they would have done but for the injury, they are entitled to be compensated for that loss.

The standard approach

The standard approach to calculating future loss of earnings involves establishing the net annual loss (‘the Multiplicand’) and multiplying it by a factor effectively representing a number of years until retirement (‘the Multiplier’) to provide a lump sum award covering the loss of earnings over the Claimant’s working life.

The Multiplicand

Calculating the Multiplicand involves predicting what the Claimant would have done in the uninjured scenario, what they will now do in the injured scenario, their net annual earnings in each scenario (by reference to sources such as witness evidence, the Annual Survey of Hours and Earnings [‘ASHE’] etc.) and deducting the latter from the former in order to calculate a net annual loss.

That process might be relatively straightforward in the case of an adult who was employed and earning a consistent salary before the injury in respect of whom the medical evidence suggests that they will be incapable of paid work in future as a result of the injury. In that scenario, the initial Multiplicand will simply be their pre-accident net annual salary, although different Multiplicands may be adopted at different stages to reflect promotion prospects in the uninjured scenario – see below. The Claimant’s loss of earnings will be what they would have earned in the uninjured scenario, with no deduction (ie. a ‘full’ loss of earnings).

In other scenarios, the Claimant might be capable of paid work following the injury, but to a lesser extent than they were prior to the injury. For example, they may need to work part time and/or in a less lucrative role than they would have done but for the injury. In that scenario, it will be necessary to calculate what the Claimant would have earned in the uninjured scenario and what they will now earn in the injured scenario (their ‘residual earning capacity’) and claim the difference between the two.

In other scenarios, calculating the Multiplicand might be less straightforward. In the case of a child, for example, it will be necessary to consider their education records and potentially take witness statements from teachers in order to predict what they would have done in future but for the injury and what they will now be capable of doing. It might also be appropriate to consider the academic attainments, employment history and attitudes of parents. In appropriate cases, an older sibling might be used as a comparator and it might be appropriate to obtain evidence of their academic attainments and career progression.

It is appropriate to consider any prospects of promotion and whether different Multiplicands should be used at different stages in future. For example, it might be that a 30 year old Claimant was earning a net salary of £30,000 per annum at the time of the injury, but it might be reasonable to assume that that they would have been promoted or otherwise secured pay rises to £40,000 age 40 and £50,000 age 50. In this respect, it might be appropriate to consider the Claimant’s education and employment records and to a take witness statement from their employer, addressing the Claimant’s pre-accident performance and prospects of promotion and likely earnings at different stages in the relevant sector.

Even where a Claimant has returned to their pre-injury role, working the same hours and earning the same wages, it will be necessary to consider whether, but for the accident, they would have been promoted, whereas, as a result of their injury, they are now likely to remain at the same level.

The Multiplier

Once an appropriate Multiplicand has been calculated, it must be applied to a ‘Multiplier’ in order to calculate the Claimant’s total loss of earnings over the remainder of their working life. Where several Multiplicands are selected, the Multiplier can be split over the relevant period. The current Loss of Earnings Multipliers can be found in the 8th edition of the Odgen Tables (a set of actuarial tables used to calculate future losses in personal injury claims).

In the absence of evidence to the contrary, it would normally be assumed that, but for the injury, the Claimant would have worked to their usual state retirement age. The medical evidence might suggest that, as a result of their injury, the Claimant will now need to retire early, which must be taken into account when calculating the Multiplier in the injured scenario.

The Multiplier effectively represents a number of years until retirement, adjusted by a figure known as the ‘Discount Rate’, currently -0.25%, effectively meaning that the net annual loss is increased by 0.25% per annum to reflect the difference between interest accrued on damages invested in a low-risk investment and inflation.

The Multiplier (in the injured and uninjured scenarios) is adjusted to reflect the three factors which, statistically, most affect the likelihood of experiencing unemployment in future, namely whether the Claimant was ‘disabled’ or ‘not disabled’ (in accordance with the definition under the Equality Act), ‘employed’ or ‘not employed’ and their highest level of academic attainment (namely Level 1, Level 2 or Level 3, being ‘less than good GCSE’, ‘GCSE/A-Level’ or ‘graduate level’). The relevant factors can be found in Table A of the Ogden Tables.

In certain circumstances, it might be that a Claimant has returned to the same role, earning the same amount as before the injury, but the evidence suggests that, as a result of the injury, they are ‘disabled’ and more likely to lose their job and/or less likely to secure alternative employment in the event that they do. In those circumstances, it might be appropriate to calculate future loss of earnings on the basis that the Claimant’s pre-and post-accident earnings are identical, save that, before the accident, they were ‘not disabled’, whereas they are now ‘disabled’ and thus to use the ‘disabled’ multiplier when calculating residual earning capacity. This will produce a net loss of earnings to reflect the increased risk of the Claimant being out of work in future, despite them having returned to their pre-injury role. Where this approach produces an unrealistic result, a Smith award might be more appropriate – see below.

Other approaches

In certain circumstances, the conventional Multiplicand x Multiplier approach might not be appropriate, particularly where it produces an unrealistic result. In such cases, the Court might be minded to award (or the parties might agree) either a Smith award or a Blamire award (or, in some cases, a combination of both).

A Smith award (as first used in Smith v Manchester [1974] EWCA) is a lump sum award to compensate a Claimant where, as a result of the injury, they are disadvantaged on the labour market such that, were they to lose their current job, it would take them longer to secure alternative employment and/or they would struggle to secure similarly paid employment.

A Blamire award (as first used in Blamire v South Cumbria Health Authority [1993] PI QR 1) is a ‘broad brush’ lump sum award to compensate the Claimant for a continuing loss of earnings where there are too many uncertainties to adopt the conventional Multiplier x Multiplicand approach. A Blamire award might be appropriate, for example, in cases involving a self-employed Claimant working in a niche sector affected by a range of external factors which are difficult to predict.

Non-typical Claimants

In certain cases, the Claimant’s pre-accident role might be such that a different approach is necessary and/or additional evidence is required.

In cases in which the Claimant is self-employed or the owner of a business of which they are an employee, with earnings potentially comprising a salary and a share of the profits in the business, calculating past and projected future earnings might be complicated. In such circumstances, it might be appropriate to instruct an expert forensic accountant to calculate the Claimant’s true earnings and any future earnings, potentially including the likely future trajectory of any business.

Occasionally, in cases involving a Claimant working in a niche industry, in might be appropriate to instruct an Employment expert to comment on factors affecting earning capacity in that sector.

David King of Irwin Mitchell

David King is an APIL-accredited Brain Injury Specialist and Senior Litigator. He is an Associate Solicitor in Irwin Mitchell’s Leeds Neurotrauma team. He specialises in helping people who have suffered traumatic brain injuries, often as a result of a road accident or an accident at work.

Irwin Mitchell are a national law firm whose solicitors work hard to make things easier for their clients and their family. Over the past 2 years they have helped clients recover more than £1 billion in compensation, but this is only part of the story, their solicitors also help clients access the rehabilitation, medical care and support needed to achieve the best recovery possible.

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