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Added damages to compensate for adverse tax consequences of lump-sum back pay award
February 04, 2009 by Ross Runkel at LawMemo
An employee who wins a discrimination case gets a lump-sum award. Can she get an additional award to make up for the additional taxes she will pay due to getting a lump sum award?
Yes, says the 3rd Circuit: Eshelman v. Agere System (3rd Cir 01/30/2009).
Joan Eshelman sued her former employer, asserting a disability discrimination (discriminatory discharge) claim under the Americans with Disabilities Act (ADA). She prevailed after a jury trial, and was awarded substantial damages. Eshelman was awarded additional damages to compensate for the negative tax consequences arising from a lump-sum back pay award. The 3rd Circuit affirmed.
The trial court awarded additional damages to compensate for the fact that the amount of tax on Eshelman’s lump-sum back pay award was more than the amount her tax would have been had she received the funds in the normal course of employment. The employer argued that this additional award constituted error. The court disagreed.
The court held that a trial court “may, pursuant to its broad equitable powers granted by the ADA, award a prevailing employee an additional sum of money to compensate for the increased tax burden a back pay award may create.” The court reasoned, “[o]ur conclusion is driven by the ‘make whole’ remedial purpose of the anti-discrimination statutes. Without this type of equitable relief in appropriate cases, it would not be possible ‘to restore the employee to the economic status quo that would exist but for the employer’s conduct.’” The court noted that an employee bears the burden of showing the existence of an adverse tax consequence justifying this type of relief. The court also noted that the 10th Circuit awarded this type of relief in Sears v. Atchison, Topeka & Santa Fe Ry. Co., 749 F2d 1451 (10th Cir 1984).
My view: Sounds right to me. The key is "make whole." No more, no less.
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