I n a pair of decisions earlier this year, the United States Court of Appeals for the Third Circuit, which has jurisdiction over federal claims arising within Pennsylvania, New Jersey and Delaware, and a district court within the Eastern District of Pennsylvania issued decisions which will make it more expensive for employers facing claims of employment discrimination or claims under the Family Medical Leave Act to resolve those claims.
In Eshleman v. Agere Systems, Inc., 554 F.3d 426 (3d Cir. 2009), the Third Circuit considered whether a plaintiff, who had won at trial on her claim of disability discrimination, was entitled to an enhancement of her damages award to compensate her for the negative tax consequences of her receipt of that back pay award in a single year. Joan Eshleman had been discharged from Agere Systems in a reduction-in-force in 2001. She sued her former employer for disability discrimination, and at trial the jury awarded her back pay and compensatory damages in the total amount of $200,000. Upon her motion made after the trial, the trial judge awarded her $6,893.00 as an enhancement to offset the tax consequences of her receipt of the lump sum back pay award. Specifically, the district court determined that because Eshleman had to pay more in taxes based on her receipt of the lump sum award in a single year than she would have had to pay had she received the pay in the normal course of her employment over a several year period, she was entitled to an enhancement.
The Third Circuit agreed, and affirmed the enhancement, finding that awards of back pay are taxable, and that it is within the equitable power of the district court to fashion an award that makes a plaintiff whole as a result of the discrimination she experienced. Because an employee may be subject to a higher tax bracket based on receipt of a lump sum back pay award in a given year, and therefore would have a greater tax burden than if she received that pay in the normal course of business, a tax enhancement award is permissible. One other appellate court, the Tenth Circuit Court of Appeals, which has jurisdiction over federal claims arising in Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, has reached a similar conclusion. However, the United States Court of Appeals for the District of Columbia has reached the opposite conclusion.
In a different decision, Brown v. Nutrition Management Services Company, 2009 WL 281118 (E.D.Pa. January 30, 2009), a court in the Eastern District of Pennsylvania held that a plaintiff who was successful in her claim under the federal Family Medical Leave Act ("FMLA") was entitled to an enhancement of her back pay award to include pre-judgment interest on the amount awarded, and liquidated damages equal to the sum of the back pay plus the interest awarded. In the Brown case, the additional interest award was $6,655.82, and the liquidated damages awarded were $80,655.82.
These two cases will make it more difficult and expensive for employers who are defending claims under the Family Medical Leave Act or claims of employment discrimination to settle such claims, because plaintiffs in states where these decisions apply now have a strong argument that they are entitled to an enhancement of their award. It is important when litigating these types of claims to be aware of the tax issues relating to these awards. When settling these cases, it is important to consider how to allocate the settlement amounts properly in order to survive scrutiny by the taxing authorities, and to articulate clearly how liability for taxes will be allocated in any settlement agreement. If litigating these claims through trial, it is important to consider the likelihood of tax enhancement award, and to be prepared to offer expert testimony as to why a tax enhancement is unnecessary, or why it need not be as high as a plaintiff argues it should be.
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