A federal appeals court has ruled that a former employee’s Title VII jury award was taxable back pay and front pay. The employer, therefore, didn’t need to seek the trial court’s approval to withhold taxes, even though the award didn’t explicitly allow the employer to withhold. (Noel v. New York State Office of Mental Health Central New York State Psychiatric Center, No. 10-3483, 2nd Cir., 2012)
We, the jury. An employee sued his employer for retaliation under Title VII and won a $318,217 judgment, including $280,000 for back pay and front pay. The employer sent a check directly to the employee for $139,582, which was net of withholding.
The employee went back to court, arguing that he was entitled to the full jury award. Employee: When the obligation to pay is based on a jury award, the payment isn’t wages subject to withholding because it’s a judgment against a liable party. The employer, pointing to the tax code, insisted that the award was taxable wages. The IRS chimed in as well, taking the employer’s side.
Employer behaving badly. The trial court ruled for the employee, and required the employer to repay the withheld taxes. The court also chastised the employer for sending the check directly to the employee without consulting or copying his lawyer or the court.
The appeals court reversed and ruled that the award was wages subject to withholding. Appeals court: Title VII awards for back pay and front pay are wages, and employers have a duty to withhold federal and state income taxes and FICA taxes. Although the trial court had discretion to oversee the procedure by which those deductions were made, it shouldn’t have ordered the employer to repay the withheld amounts, the court concluded.
TEMPER, TEMPER: No doubt, the trial court was piqued because the employer appeared to do an end run around it. You can avoid similar unpleasantness by staying in the loop during any employment litigation. Remindand your attorneys that back pay and front pay are fully taxable. Suggestion: Ask your attorneys to insert the phrase “less lawful required withholding” into any settlement agreement or jury award. That way, all ambiguity regarding the taxability of the payments is cleared up.