November 21, 2017

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Federal Appeals Court Endorses Tax-Offset Damages

A new damages theory under Title VII of the Civil Rights Act that in certain circumstances may increase lost-pay damages in employment discrimination matters by at least 10 percent has been endorses by the federal appeals court in Chicago.

Under the U.S. Court of Appeals for the Seventh Circuit’s ruling, a successful employee-plaintiff in a discrimination matter is entitled to payment in an amount equaling the increased tax burden faced by the plaintiff receiving a lump-sum backpay award.

EEOC v. Northern Star Hospitality, Inc., 777 F.3d 898 (7th Cir. 2015). The Seventh Circuit has jurisdiction over Illinois, Indiana, and Wisconsin. In Northern Star, the Equal Employment Opportunity Commission brought a lawsuit under Title VII on behalf of Dion Miller, who, accordingto the EEOC, while earning $14 an hour as a cook for Northern Star, was subjected to racial harassmentand eventually was terminated in retaliation for complaining about the alleged racial harassment.

The trial court dismissed the EEOC’s claim of racial harassment, but a jury found Northern Star unlawfully retaliated against Miller. The district court judge awarded Miller $43,300.50 in backpay and, at the EEOC’s request, an additional $6,495 to offset the impending tax liability that will result from the lump-sum backpay award, estimated at 15 percent of the backpay award.

After the dissolution of Northern Star, its successors appealed the district court’s tax offset award. The Seventh Circuit acknowledged that it had not previously addressed the permissibility of tax offset awards. The Seventh Circuit first observed the remedial scheme of Title VII is offended when a successful plaintiff is not “made whole.” According to the Court, because of the $43,300.50 lump-sum payment, Miller would be pushed into a higher tax bracket and be required to pay more taxes than he would have had to if he been paid on a regular, scheduled basis. Miller was receiving less take-home pay because of the discrimination, which forced the lawsuit and the lump-sum payment, reasoned the Court. Thus, it was appropriate to provide Miller with the tax offset, the Court determined. In this, the Seventh Circuit joins the Third and Tenth Circuits in affirming a tax-component award in the Title VII context. (The Third Circuit has jurisdiction over Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands. The Tenth Circuit has jurisdiction over Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming.)

The Seventh Circuit then criticized the district court for not explaining how it arrived at a figure of $6,495 as the offset. However, it found the award was within the district court’s discretion in granting the offset.

Implications

Following this ruling, the cost for employers of losing a discrimination lawsuit, in many circumstances, will be higher. Modestly paid employees such as Miller will be in a good position to claim damages for tax offsets, since an individual’s first $9,075 in income is taxed at a rate of 10 percent, and income between $9,075 and $36,900 is taxed at 15 percent, jumping to 25 percent for taxable income over $36,900, and climbing to 39.6 percentfor individuals earning $406,751.

Northern Star also underscores how a slow-moving lawsuit poses risks of increased liability for employers. Courts already routinely provide plaintiffs with prejudgment interest at the Internal Revenue Service prime rate, typically compounded quarterly.

An employee can wait 300 days before filing a charge, and it is not unusual for an EEOC investigation to last a year or more, which means an employee can have accumulated two years of backpay even before filing the lawsuit, and that lawsuit may not come to trial for a year or more. Such cases are ripe for windfall backpay awards, increased tax rates for the lump-sum backpay award, and a corresponding significant tax offset payment.

Jackson Lewis P.C. © 2017

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About this Author

Scott A. Carroll, Jackson Lewis, collective bargaining lawyer, union avoidance attorney
Office Managing Principal

Scott A. Carroll is Office Managing Principal of the Cincinnati and Dayton, Ohio, offices of Jackson Lewis P.C.

Mr. Carroll has represented clients across the spectrum of labor and employment law, including wrongful discharge litigation, collective bargaining, union avoidance, and human resources counseling. He has expertise in wage hour and other multi plaintiff employment cases.

Mr. Carroll lectures frequently on all aspects of labor and employment law matters. Mr. Carroll serves on...

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