Vacating a district court’s order denying a Title VII plaintiff a tax adjustment of his damages award, a Ninth Circuit panel concluded that the lower court erred in refusing to consider adjusting his lump-sum back-pay award to account for the corresponding increase in his tax liability. In Title VII cases, district courts have discretion to award the equitable relief of a “gross-up” adjustment to compensate for increased income-tax liability resulting from a plaintiff’s receipt of a back-pay award in one lump sum, the appeals court held, agreeing with rulings by the Third, Seventh, and Tenth Circuits (Clemens v. Qwest Corp., November 3, 2017, Owens, J.).
In 2008, the defendant employer, Qwest Corporation, initiated disciplinary proceedings against the plaintiff, a long-time employee. “For a period longer than the American Civil War,” the court quipped, the plaintiff and Qwest “contested his work performance in internal proceedings and interviews, in arbitration, and before the Washington State Human Rights Commission.” In 2013, the plaintiff sued, alleging Title VII claims of race discrimination and retaliation.
Damages award. Following a trial, a jury found in the employee’s favor on his retaliation claim and awarded him over $157,000 for lost wages and benefits, over $275,000 for emotional distress, and $100,000 in punitive damages. In order to comply with Title VII’s cap on compensatory and punitive damages, the district court reduced the latter two awards to $300,000. It also granted the plaintiff’s motions for attorneys’ fees and, in part, an interest award. Yet, the trial court denied his request for a “tax consequence adjustment” or “gross up” to compensate for increased income-tax liability resulting from his receipt of his back-pay award in one lump sum. Pointing to the lack of authorization from the Ninth Circuit, the split among other federal circuits on this issue, and the parties’ disagreement regarding an appropriate methodology for calculating the tax consequences of a lump-sum payment, the lower court declined to exercise its discretion to “gross up” the plaintiff’s damages award.
Title VII authorizes courts to award “gross ups.” The appellate court began its analysis by explaining that Title VII grants courts the authority to award back-pay “gross-ups.” Citing U.S. Supreme Court precedent and well as its own, the Ninth Circuit noted that Title VII exists in large part to make persons whole for injuries suffered on account of unlawful employment discrimination. To that end, Title VII provides courts with considerable equitable discretion to ensure adequate compensation. Pointing to its recent decision in Bayer v. Neiman Marcus Group, Inc., the Ninth Circuit reiterated that a district court “‘has not merely the power but the duty to render a decree which will so far as possible eliminate the discriminatory effects of the past as well as bar like discrimination in the future.’”
While back pay and prejudgment interest on back-pay awards are manifestations of this principle, back-pay awards are taxable, the panel noted, adding that a lump-sum award will sometimes push a plaintiff into a higher tax bracket than he would have occupied had he received his pay incrementally over several years. Such was the situation that the plaintiff claimed here. He asserted that his expanded tax burden effectively denied him the full relief promised in Title VII.
Circuit split. Surveying the appellate court precedent on this issue, the Ninth Circuit observed that the Third (Eshelman v. Agere Sys., Inc. (2009)), Seventh (EEOC v. N. Star Hosp., Inc. (2015)), and Tenth Circuits (Sears v. Atchison, Topeka & Santa Fe Ry. (1984)) have all held that district courts have the discretion to “gross-up” an award to account for income-tax consequences, but the D.C. Circuit does not. Noting that the D.C. Circuit’s 1994 single-paragraph per curiam opinion in Dashnaw v. Pena erroneously cited a lack of authority for such relief—despite the Tenth Circuit’s ruling in Sears, as well as the Supreme Court’s existing statements regarding make whole relief, and Title VII’s equitable underpinnings—the Ninth Circuit characterized Dashnaw as “matchbook musings.” Joining what it characterized as the “thoughtful analysis” of the Third, Seventh, and Tenth Circuits, the Ninth Circuit panel agreed with their rulings on this issue.
Quest argued, for the first time on appeal, that (1) monetary relief is legal, not equitable, and (2) only a jury can award a back-pay tax adjustment. Rejecting those assertions, the appeals court ruled that these arguments were both waived and at odds with the controlling Title VII case law.
Awarding “gross up” is within trial court’s discretion. The Ninth Circuit also agreed with the Third, Seventh, and Tenth Circuits that the decision whether to award a gross-up, and what the appropriate amount of any such gross-up should be, should be left to the sound discretion of the trial court. Quoting the Third Circuit’s decision in Eshelman, the Ninth Circuit agreed that a prevailing plaintiff “is not presumptively entitled to an additional award to offset tax consequences,” but rather, the nature and amount of relief needed to make an aggrieved party whole necessarily depends on the circumstances of each case. That said, the party seeking relief bears the burden of showing an income-tax disparity and justifying any adjustment. The Ninth Circuit panel declined to express an opinion on whether a gross-up was appropriate in the present case.
As a last gasp, Qwest claimed that the district court did exercise its discretion in refusing the plaintiff a tax gross up. Even though the Ninth Circuit found the district court’s ruling on this issue to be “somewhat opaque,” it was, nevertheless, clear that the lower court declined to consider a gross-up in part because the Ninth Circuit had never authorized one. “Consistent with all of the courts that have thoughtfully addressed this issue, we do so now,” the Ninth Circuit wrote. Accordingly, the panel vacated the district court’s order denying a tax adjustment and remanded the case for further proceedings.
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