Third Circuit upholds gross-up of lump-sum employment discrimination award to reflect plaintiff's tax burden - Eshelman v. Agere Systems.

• Author: Haas, B. Benjamin

Background

On January 30, 2009, tile U.S. Court of Appeals for the Third Circuit Court upheld the gross-up of a lump-sum award to reflect the increased tax burden of a winning plaintiff in an employee discrimination case. Eshelman v. Agere Systems, Inc. (1) involved the tax treatment of a lump-sum employment discrimination award. Specifically, the plaintiff in the case instituted a lawsuit claiming her employer had discriminated against her in violation of the Americans with Disabilities Act (ADA) and had unlawfully discharged her either because of cancer-related disability or because it regarded her as disabled. In the U.S. District Court for the Eastern District of Pennsylvania, the jury found in the plaintiff's favor and awarded her back pay and compensatory damages totaling $200,000.

Following the trial, the district court granted the plaintiff's post-trial motion to augment the jury's award to offset the negative tax consequences that she would incur from receiving the lump-sum back pay award. (2) The defendant-employer appealed the decision, claiming in part that the district court had improperly granted the plaintiff's post-trial motion to augment the jury's award. The Third Circuit upheld the district court's decision granting the gross-up amount under an abuse of discretion standard. (3) In doing so, the Third Circuit followed the Tenth Circuit, which considered the issue in Sears v. Atchison, Topeka & Santa Fe Railway Co. (4) In that case, the district court awarded the employees in a Title VII lawsuit compensation for the additional tax liability incurred as a result of receiving 17 years of back pay in a lump sum. In sustaining the award, the Tenth Circuit recognized that the trial court has wide discretion in fashioning remedies to make victims of discrimination whole and observed that, though perhaps not be appropriate in a typical case, it was appropriate under the facts in Sears.

In Eshelman, the Third Circuit likewise concluded that a district court may, pursuant to its broad equitable powers, award a prevailing employee additional money to compensate for the increased tax burden resulting from a lump-sum award of back pay. Citing the "make whole" remedial purpose of antidiscrimination statutes, the court stated that "[w]ithout this type of equitable relief in appropriate cases, it would not be possible to restore the employee to the economic status quo that would exist but for the employer's conduct."' (5) In addition, the...