Back Pay Recovery Can Include Tax Burden

A person who suffers job-related discrimination may be awarded back pay. Recently, a district court said that the award could be increased to account for the person’s tax bill on the recovery (Greg Allen, et al., District Court, Indiana, 4-18-17, No. 1:02-cv-00902).

The case involved an electrician who was denied a job because of race. He was awarded $363,000 for back pay. Such an award is includible in gross income; only amounts for personal physical injury are excludable. The district court permitted the award to be increased to reflect the tax liability on that award. The case was brought within the Seventh Circuit, and in 2015 the Seventh Circuit joined the Third and Tenth Circuits in holding that it is appropriate to provide an additional award to account for the tax burden in cases involving racial discrimination (Title VII of the 1964 Civil Rights Act).

These three appellate courts (the Third, Seventh, and Tenth Circuits) have recognized that if the pay had been received in the regular manner, the taxes would have been much lower than they are when received in a lump sum. In order to make the injured party whole, taxes should be factored in.