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Extra damages can be awarded to cover tax consequences

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in Discrimination and Harassment,Firing,Human Resources

A jury awarded Richard O'Neill $519,000 in his age discrimination lawsuit against Sears. But O'Neill asked the judge to award extra damages to cover the tax burden of receiving back pay in a lump sum, rather than spread out over several years.

His argument: A lump sum would push him into a higher tax bracket than he would have been in if he received his regular salary.

The judge agreed and ordered Sears to cough up an additional $38,780 to make up for the negative tax consequences. The judge reasoned that the goal of the Age Discrimination in Employment Act (ADEA) is to place victims in the financial position they would have been in if not for the unlawful firing. (O'Neill v. Sears, Roebuck & Co., No. 97-3767, E.D. Pa., 2000)

The decision, however, runs up against an IRS regulation that says back pay should be taxed in the year received, even though the award may cover many years worth of wages.

The big question now: whether other federal courts will apply the rationale set forth in this case to jack up awards in ADEA and other cases.

Note: Taxation of bias awards has become a hot issue in Congress. Lawmakers are debating legislation that would eliminate taxes on emotional distress awards and allow for income averaging for back-pay awards.

Advice: Tighten up your anti-discrimination efforts. This ruling gives courts added incentive to hike up damage awards. Also, consult with counsel and a tax specialist when drafting any settlement.

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