Assessing Earning Capacity in Business Owners, Self-Employed Workers and Contractors
Assessing the earning capacity of business owners, self-employed workers and contractors can be particularly complex as some or all of income can be derived from the work or labor of others or profits from a business. The earnings for self-employed or contract workers are based on earnings of the business they operate, which includes gross revenue, expenses, and profit. When assessing potential loss of earning capacity, it is very helpful when earnings records are provided. However, accurate earnings records in the form of tax returns are often unavailable or incomplete, and little documented or verified information is known about the earnings of the self-employed or contract worker. Examples of the self-employed workers we evaluate for earning capacity include business owners, professionals, skilled workers, such as mechanics, carpenters, contractors, and landscapers.
Let’s take an example of a contractor who renovates houses. This contractor operates the business as an owner, and sub-contracts other skilled workers to perform the jobs of a carpenter, roofer, plumber, electrician, painter, etc. This contractor’s earning capacity is based on the profits of the company. It may be that after an accident or injury the contractor can maintain the historical level of operations, or there may be a reduction in productivity due to physical limitations, time lost to medical treatment, or other limitations. Intuitively, a loss of earning capacity can be determined by assessing the difference of pre-injury earnings compared to post-injury earnings, however, such a calculation is multi-faceted. In addition to simple profit and loss analysis, external factors may influence potential earnings such as the overall health of the economy or the strength of the real estate market.
A common scenario involves a contractor who performs some degree of the labor him or herself. For example, the contractor may do all or some portion of the carpentry, roofing, plumbing, electrical work, painting, etc. If the index injury has left the contractor with limitations that prevent the performance of the more physical pre-injury job tasks, how would we best determine the contractor’s loss of earning capacity? There are many factors to consider, and no one method can definitively calculate the loss of earning capacity. Similar analyses require a flexible approach that takes into consideration all available information.
One typical method to assess the post-injury earning capacity includes assessing the wage earning capacity of the same occupation as if the owner/contractor were a salaried worker. This approach is most appropriate when the owner/contractor can work as an employee. If the contractor had a pre-injury earning capacity of $5,000 per month, and can now be a trim painter, and the wage range for a trim painter is $1,500 to $2,000 per month, with an average wage of $1,800 per month, then the loss of earning capacity can be assessed as ranging from $3,000 – $3,500 per month, with an average loss of $3,200 per month.
Another method of calculating a loss is to account for the cost of modifying the worker’s job, such as hiring a helper/laborer to perform the tasks the contractor can no longer provide. This method is similar to compensation for lost ability to provide services. The services of the laborer are considered an additional expense to the owner/contractor, thus equivalent to their loss of earning capacity. If the contractor had a pre-injury earning capacity of $5,000 and the cost of hiring the laborer/helper ranges from $1,500 to $2,000 per month, with an average of $1,800 per month, then the loss of earning capacity can be calculated as the additional cost of the helper/laborer.
In some instances, such as commission or production compensation, a method to assess the loss of earnings can be based on time. For example, we can assess what the worker generally earns minus those earnings he would not be able to achieve because he cannot be “on the job” due to the limitations from the injury. If a contractor averaged $5,000 per month working 200 hours per month and then becomes physically limited to half-time work, the contractor would experience a loss of earning capacity of $2,500 per month.
Depending on the case, Stokes & Associates, Inc can employ a number of credible methods to determine the loss of earning capacity for business owners, self-employed and contract workers. Although there are limitations to the validity and reliability of such assessments, thoughtful analysis requires gathering as much information as possible and making judgments based on generally accepted and reasonable methods.
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To strategize with one of our experts at Stokes & Associates, Inc. please call David Barrett at 504-454-5009, visit our website, www.stokes-associates.com or email firstname.lastname@example.org.
Larry S. Stokes, Ph.D.
Aaron Wolfson, Ph.D.
Lacy Sapp, MHS, CRC, LPC, LRC, CLCP
Todd Capielano, M.Ed., LRC, CRC, LPC, CLCP