When a jury awards a lump sum back-pay award in a Title VII case, can a district court "gross up" the award to compensate for increased income-tax liability resulting from a plaintiff’s receipt of a back-pay award in one lump sum?
The 9th Circuit says "Yes." Clemens v. Qwest Corporation [Centurylink Inc] (9th Cir 11/03/2017).
Arthur Clemens sued Qwest for race discrimination and retaliation in violation of Title VII, and a jury found for Clemens on his retaliation claim. The jury awarded over $157,000 for lost wages and benefits, plus damages for emotional distress and punitive damages.
Clemens requested the district court to grant 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. The district court explained that “[g]iven 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,” it declined “to exercise its discretion to ‘gross up’ plaintiff’s damages award.”
Although the 3rd, 7th, and 10th Circuits (but not the DC Circuit) allow such a gross-up, the district court thought the 9th Circuit had not allowed it.
The 9th Circuit had little trouble concluding that 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.
Back-pay awards are taxable. When there is a lump-sum award, the recipient can be thrown into a higher tax bracket. The 9th Circuit reasoned that the extra taxation could result in a plaintiff not being made whole.
Of course, all of this is left to the discretion of the district court. It's not automatic. As the 9th Circuit put it:
"There may be many cases where a gross up is not appropriate for a variety of reasons, such as the difficulty in determining the proper gross up or the negligibility of the amount at issue. In any case, the party seeking relief will bear the burden of showing an income-tax disparity and justifying any adjustment."