In Eshelman v. Agere Systems, Inc., 2009 WL 223858 (2009) the Court held that a back pay award may be augmented to offset the adverse tax consequences of a lump-sum payment.

A one-time, lump-sum award of back pay may have unanticipated consequences for a plaintiff in employment discrimination litigation. Back pay awards are taxable. Taxes are incurred in the year paid. When the entire amount of back pay is received at once rather than over a period of time, plaintiff may wind up in a higher tax bracket and be subject to greater tax liability.

The jury awarded plaintiff $170,000 in back pay after finding that defendant violated the Americans with Disabilities Act (ADA; 42 U.S.C.A. § 12101, et seq.) and an analogous Pennsylvania statute. Plaintiff moved for an additional monetary award to offset the negative tax consequences of receiving the back pay award in a single lump sum. The District Court granted the motion and increased the award by $6,893.00.

The defendant argued that there was no legal support for the Courts action. The 3rd Circuit disagreed. It held that a District Court may, pursuant to the broad equitable powers granted by the ADA, award a prevailing plaintiff in ADA litigation an additional amount to compensate for the increased tax burden a lump-sum back pay award may create.

The Court reasoned that a chief remedial objective of the federal employment discrimination statutes is to make victims of discrimination whole. Courts have broad equitable powers to effectuate this "make whole" remedy. See Franks v. Bowman Transportation Co., Inc., 424 U.S. 747 (1976). In the 3rd Circuits view, without an additional amount to offset the increased tax burden resulting from a lump-sum receipt of back pay, it is not possible to restore a plaintiff to the economic status quo that would have existed but for the defendants discriminatory conduct.

Whether a back-pay award may be "grossed up" to offset the adverse tax consequences of a lump-sum payment is a question without a definitive answer, at this time. Some courts say yes. See Sears v. Atchinson, Topeka and Santa Fe Railway Company, 749 F.2d 1451 (10th Cir. 1984). Others say no. See Fogg v. Gonzalez, 492 F.3d 447 (2007).

Interestingly, any request for an enhancement should be made part of the damage request rather than reserved for any post-trial motions. The reason is that post-trial enhancement may be deemed an additur that violates the 7th Amendments prohibition against judicial re-examination of a jurys finding. See Kelley v. City, 206 WL 1304954 (2006).

Pat McGrath