Court orders gross-up of back pay award

As if being liable for retaliating against an employee for filing discrimination charges wasn’t bad enough, a federal appeals court has ruled that an employer must also compensate the discriminated-against employee for the extra taxes that are due on a lump-sum back pay award by grossing it up. (Clemens v. CenturyLink, Inc., No. 15-35160, 9th Cir., 2017)

Pay and pay again. An employee sued his employer for Title VII violations and retaliation and won $157,000 in back pay and benefits from a jury. The jury also awarded him more than $275,000 in emotional distress damages and $100,000 in punitive damages, which the court reduced to $300,000 to comply with Title VII’s cap on compensatory and punitive damages.

The employee then asked the trial court to gross-up the back pay award, arguing that the lump-sum would vault him into a higher tax bracket. The employer made no opposing argument to the trial court. The trial court ruled against the employee.

The appellate court reversed the trial court and sent the case back down to the trial court for further proceedings.

Appeals court: Unfortunately, for Title VII plaintiffs, back pay awards are taxable. A lump sum award may push the employee into a higher tax bracket. The expanded cut owed to the IRS denies him what Title VII promises—full relief that puts him where he would have been had the discrimination not occurred, the court concluded.

PAYROLL PRACTICE TIP: This employee got a little bit more than a complete restoration to the status quo, since he doesn’t have to pay any taxes on his back pay award. This case shows why it’s important for Payroll to stay in the loop during a discrimination lawsuit. No gross-up would have been required if the employee didn’t receive it in a lump sum. If you withhold or gross-up a payment, you report it on a W-2, even if the employee no longer works for you. Compensatory or punitive damages are reported on Form 1099-MISC, in Box 3.