Taxes are Inevitable … Even on Judgments For Front and Back Pay in Discrimination Cases

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Everyone knows that taxes are inevitable.  Except perhaps one employee who won his Title VII case but complained that the employer shouldn’t have made withholdings for taxes when it paid out the judgment.  The Second Circuit, in a decision released right before the Labor Day weekend, said the employer did the right thing.

You can read the case, Noel v. New York State Office of Mental Health, here. 

In the case, the employer lost a retaliation case and was ordered to pay front and back pay in the amount of $280,000.  The employer, in choosing to satisfy the judgment, made various deductions and mailed a check directly to the plaintiff (not his counsel) for $139,582.52. 

No doubt the plaintiff was surprised by the amount of deductions (which included over $94,000 in federal withholdings) and filed an objection to the amount.  The employer took the position that because the judgment was for back and front pay — i.e. “wages” — it was obligated to make with withholdings and that the plaintiff would be able to claim credits against his tax liability come tax return time.  The District Court agreed with the employee and ordered the employer to pay an additional judgment of $164,987.59.  

The Second Circuit reversed and agreed with the employer:

[We] hold that payments pursuant to judgments for back and front pay are “wages” as defined under the Internal Revenue Code and, as such, employers are required to withhold income and [FICA] taxes.  Moreover, we conclude that …. the district court should not have ordered the double payment.

The employer was taken to task for, for example, sending the check directly to the plaintiff, instead of to his opposing counsel and for making a few other improper deductions in a “somewhat bureaucratic manner” such as for union days.   “Although the state may not have conducted itself to the Queen’s taste, we nonetheless consider the remedy imposed by the district court to have been excessive.”

For the plaintiff, the loss is probably doubly hard. As noted by the Wait a Second blog, the Plaintiff actually received the extra $164,987.59 that it will now have to pay back in taxes.  Ouch.

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