In a short published opinion, the U.S. Court of Appeals for the Ninth Circuit sided with the Third, Seventh and Tenth Circuits, and split with the D.C. Circuit, over whether a federal district court may award a “tax consequence adjustment” or “gross up” for receipt of a back pay award given in one lump sum.
The relevant underlying facts of Clemens v. CenturyLink1 are straightforward: a jury found that the company had retaliated against the plaintiff and awarded him approximately $157,000 in lost back pay and benefits under Title VII. The plaintiff sought an adjustment to the award to account for his paying more in taxes because the back pay was received as a lump sum rather than having been earned over time. The district court denied the request, citing “the lack of authorization from the Ninth Circuit, the split among other Circuits on this issue, and the parties’ disagreement regarding an appropriate methodology for calculating the tax consequences of a lump sum payment.”
The Ninth Circuit reversed the district court and remanded for further proceedings. In doing so, the appellate court began by explaining that the purpose of Title VII is “to make persons who for injuries suffered on account of unlawful employment discrimination.”2 It further added that Title VII provides courts with “considerable equitable discretion to ensure adequate compensation.” Accepting that “for successful Title VII plaintiffs, back-pay awards are taxable,” the court cited to decisions from the Third, Seventh and Tenth Circuits holding that “without the tax-component award, [the plaintiff] will not be made whole, a result that offends Title VII’s remedial scheme.”3 The court then rejected the D.C. Circuit’s opinion, which it found ignored the reasoning of the other circuits and the Supreme Court’s explanation of Title VII’s “equitable underpinnings.”
Based on its analysis, the Ninth Circuit held that “the decision to award a gross up – and the appropriate amount of any such gross up – is left to the sound discretion of the district court.” It further held that a plaintiff was not “presumptively entitled to an additional award to offset tax consequences” and there may be many reasons why a gross up is not warranted, such as “the difficulty in determining the proper gross up or the negligibility of the amount at issue.”
Employers faced with jury verdicts for back pay awards should expect to see continued pushes from plaintiffs for gross ups to offset the tax effect of lump-sum back pay awards. Such awards are not automatic, and employers will need to think through not only the reasons why such an award may not be appropriate, but a proper methodology for such an award if it is ordered. Employers concerned about awards should involve employment tax counsel early in the process.