A Taxing Dilemma: Whether Gross Ups are Permitted for Title VII Back Pay Awards

When an employee sues his or her employer in a Title VII action, the employee may be awarded a lump sum as back pay. That lump sum can cause a tax problem for the employee, who may be pushed into a higher tax bracket and therefore owe more in taxes than he or she would have owed if the employer had made the payments over time. Some appellate courts have allowed federal district courts the discretion to award a tax consequence adjustment, or “gross up,” for receipt of a lump sum back pay award to offset this consequence and make the employee whole. The Ninth Circuit recently joined the Third, Seventh, Ninth, and Tenth Circuits by allowing gross ups, furthering the split with the D.C. Circuit.

The Split

 In a brief opinion, the D.C. Circuit rejected the possibility of gross ups in Danshaw v. Pena (1994), abrogated on other grounds by Rann v. Chao (2003):

We know of no authority for such relief…Given the complete lack of support in existing case law for tax gross ups, we decline so to extend the law in this case.

The Third, Seventh, Ninth, and Tenth Circuits disagree and allow district courts to award a gross up. The core of their viewpoint is that gross ups are necessary to make the plaintiff whole. Without any tax consequence adjustment, the plaintiff is still damaged by the employment discrimination. In its recent opinion joining these other Circuits, the Ninth Circuit described this position in Clemens v. CenturyLink Inc. (2017). It emphasized that Title VII exists “to make persons whole for injuries suffered on account of unlawful employment discrimination” and “provides courts with considerable equitable discretion to ensure adequate compensation.” The Ninth Circuit followed the Seventh Circuit’s opinion in EEOC v. N. Star Hosp., Inc. (2015) by citing Title VII as the source of courts’ authority to award back pay gross ups. There, the Seventh Circuit agreed with the Third and Tenth Circuits that “without the tax-component award, [the plaintiff] will not be made whole, a result that offends Title VII’s remedial scheme.”

In Eshelman v. Agere Sys. Inc. (2009), the Third Circuit noted that the decision of whether to award a gross up is within the discretion of the trial court:

[W]e do not suggest that a prevailing plaintiff in discrimination cases is presumptively entitled to an additional award to offset tax consequences above the amount to which she would otherwise be entitled. Employees will continue to bear the burden to show the extent of the injury they have suffered. The nature and amount of relief needed to make an aggrieved party whole necessarily varies from case to case.

While these four Circuits find that Title VII commands the possibility of gross ups to make a plaintiff whole, they do not find that plaintiffs are automatically entitled to the adjustment. While the D.C. Circuit categorically rejects gross ups, even in those courts that permit the possibility of gross ups, whether a plaintiff may receive a gross up, and how much of an adjustment is made, will depend on the particular case.

Looking Forward

Gross ups in awards for back pay in Title VII cases are ripe for Supreme Court review.  SCOTUS may want to settle (1) whether gross ups are permitted at all, and (2), if they are, what factors a district court should consider when exercising its discretion to make a determination in a particular case. In allowing the possibility of gross ups, the Third Circuit in Eshelman noted that a prevailing plaintiff is not automatically entitled to a gross up; the relief required to make an employee whole will inexorably vary depending on the case. The Ninth Circuit in Clemens suggested that difficulty in determining the proper gross up or negligibility of amount may be such factors that would make a gross up inappropriate, but it may be helpful to establish a set of criteria for district courts to use in their review.