Employers Responsible for Added Taxes Stemming from Lump Sum Awards

The Third Circuit Court of Appeals recently ruled that employers can be held liable for any additional taxes employees must pay when receiving a lump sum award. Eshelman v. Agere Systems, Inc., 554 F. 3d 426 (3d Cir. 2009). Joan Eshelman brought suit against Agere claiming she was discharged in violation of the ADA. She won her case and was awarded $170,000 in back pay. Following the trial she moved for an additional monetary award to offset the additional tax she had to pay on the lump sum compared to the tax she would have paid had she not been fired and earned the same amount of money over her period of employment.

The District Court granted her motion and the Third Circuit affirmed. The court found “a chief purpose of employment discrimination statutes such as the ADA is to make persons whole for injuries suffered on account of unlawful employment discrimination.” To do so permits the court to restore the employee to the economic status quo that would have existed, but for the employer’s conduct. As the plaintiff here paid more tax on the lump sum than she would have had she not been discharged it is proper for the employer to foot the difference.

The decision does not require awards to be “grossed up” to cover the entire taxable amount, but does require that the amount netted not be diminished due to the tax consequences inherent in a lump sum award. While the decision applies to states in the Third Circuit, a similar finding governs south Florida, EEOC v. Joe’s Stone Crab, Inc., 15 F. Supp. 2d 1364 (S.D. Fla. 1998).