You were wrongfully fired 10 years ago and have just won a high-profile employment discrimination lawsuit. Your salary was $80,000 a year while you were employed, and had you stayed employed in that same job, you would have been taxed 25% per year on that salary, leading to a take-home of $60,000 a year. The jury awards you $800,000 to compensate you for what you would have earned had you not been discriminatorily fired.
But in the eyes of Uncle Sam, that award is one yearly payment of $800,000, not 10 yearly awards of $80,000, and you are going to be taxed nearly 40% on that award because you are now in a higher income bracket. Your take-home on that award is therefore in the ballpark of $480,000, while if you had never been fired, your aggregate take-home after 10 years would have been $600,000.
So how can you be made whole? Can the court give you some extra money to make up the difference?
In the Ninth Circuit, the answer to that is now "Yes."
Earlier this month, the court considered the case of Arthur Clemens, a long-time employee for Qwest Corp. in Washington who engaged in a lengthy battle with the company over his race discrimination and retaliation claims. Clemens v. Centurylink Inc., No. 15-35160, 2017 BL 397023, 130 FEP Cases 908 (9th Cir. Nov. 03, 2017), Court Opinion
Clemens asked the court to award him a “gross up” or a “tax consequence adjustment” in order to compensate for the increased tax liability he was due to incur as a result of receiving his back-pay award as one lump sum. The district court declined to give him the extra award, citing a lack of authorization to do so from the Ninth Circuit.
Ninth Circuit’s Decision and Rationale
The Ninth Circuit vacated the decision and concluded that the federal district court is authorized to consider whether Clemens is entitled to consider the additional award. The court explained that because Clemens’s back-pay award will be issued as a lump-sum award, he will pay more in taxes on that award than he would have had he been paid incrementally over the course of the employment discrimination.
Recognizing that Title VII’s purpose is to eradicate discrimination throughout the economy, a “gross-up”, or, in this instance, the possibility of one subject to the district court’s discretion, is necessary to make Clemens whole for the employment injuries he suffered.
While the Third Circuit (Eshelman v. Agere Sys., Inc., 554 F.3d 426, 21 AD Cases 865 (3d Cir. 2009) (“[A] district court may, pursuant to its broad equitable powers granted by [42 U.S.C. § 2000e-5], award a prevailing employee an additional sum of money to compensate for the increased tax burden a back pay award may create.”), Seventh Circuit (EEOC v. Northern Star Hosp., Inc., 777 F.3d 898, 125 FEP Cases 1681 (7th Cir. 2015) (“[W]ithout the tax-component award, [the plaintiff] will not be made whole, a result that offends Title VII's remedial scheme”), and Tenth Circuit (Sears v. Atchison, Topeka & Santa Fe Ry., 749 F.2d 1451, 36 FEP Cases 783 (10th Cir. 1984) (“[T]he trial court has wide discretion in fashioning remedies to make victims of discrimination whole”) have allowed for an additional award to compensate a Title VII claimant in order to make him or her whole, the D.C. Circuit has not permitted such an award. In Dashnaw v. Peña, 12 F.3d 1112, 304 U.S. App. D.C. 247, 67 FEP Cases 3 (D.C. Cir. 1994), the court denied a gross-up to a former Department of Transportation employee on his age discrimination claim solely on the rationale that “[g]iven the complete lack of support in existing case law for tax gross-ups,” it would not “extend the law in this case.” Ten years ago, the court reaffirmed Dashnaw, reversing a district court gross-up of 14% to a former U.S. Marshals Service employee, explaining that the holding in Dashnaw was based on the absence of case law supporting gross-ups, not because of the size of the award, as the plaintiff had argued. Fogg v. Gonzales, 492 F.3d 447, 377 U.S. App. D.C. 148, 100 FEP Cases 1601 (D.C. Cir. 2007), Court Opinion.
The D.C. Circuit’s reasoning in denying gross-ups, somewhat like that of the district court in Clemens, is based on a lack of clear guidance as to whether such awards are appropriate, not that they are plainly impermissible. There is thus an argument to be made that the reasoning, rather than the result, is not entirely in conflict with the other circuits and that it might be some time before the Supreme Court takes up the issue. To stay up to date on any new developments, be sure to keep up with Bloomberg Law®!
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