Additional Compensation Warranted to Offset Tax Implications of Discrimination Awards
By Tiffanie Benfer
Two weeks ago the Third Circuit Court of Appeals in Eshelman v. Agere Systems ruled that prevailing Plaintiffs in employment discrimination cases are entitled to be made whole for injuries caused by employer discrimination.
Eshelman argued that the taxes she would have to pay on the lump sum award of back pay would be higher than what she would have had to pay in the normal course of her employment had she not been discriminated against. In some cases, a lump sum payment award places the employee in a higher tax bracket for that year. A straight award of back pay would therefore, not make the employee “whole” for the damages incurred as a result of the employer’s discrimination.
Eshelman asserted that an additional monetary award was warranted to offset the negative tax consequences of the back pay award she received in her favorable finding. Eshelman’s argument is completely logical. To make her pay higher taxes on income she would have earned but for her employer’s discrimination would just add insult to injury.
The three judge panel agreed with Eshelman, and noted that the “chief remedial purpose of employment discrimination statutes such as the ADA is ‘to make persons whole for injuries suffered on account of unlawful employment discrimination.’” Thus, the court concluded that if the employee’s back pay judgment would cause the employee to incur additional taxes, then the employee would be entitled to additional compensation.
The courts are not in agreement that additional compensation is necessary in some instances to make the employee that endured discrimination whole again. For example: the D.C. Circuit Court in Dashnaw v. Pena rejected the idea that prevailing employee is warranted additional compensation to off set the tax implications created by an award of back pay. Employment Law attorneys routinely struggle with this issue, and would welcome a resolution by the Court. Given the split in the Appellate Courts, this issue appears to be ripe for consideration by the Supreme Court.