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Clemens v. Qwest Corp., No. 15-35160 (9th Cir Nov. 3, 2017)

The Ninth Circuit becomes the fourth court of appeals to recognize tax gross-up awards to successful Title VII plaintiffs, which recognize (and compensate for) the tax penalty that plaintiffs suffer when they receive lump sums of back pay in a single tax year. 

Clemens v. Qwest Corp., No. 15-35160 (9th Cir. Nov. 3, 2017): By the time a Title VII case goes to trial, a plaintiff may have accumulated several years of back pay liability. But if they are successful at trial, the award of back pay - which the Internal Revenue Service considers to be taxable income - may push them into a higher tax bracket, imposing an effective penalty for receiving all of the money in one tax year.

Since the 1990s, courts have recognized that Title VII back-pay awards (deemed to be equitable remedies) may be adjusted upward to account for this tax effect. The Third, Ninth and Tenth Circuits have endorsed such awards. But one circuit, the D.C. Circuit, has denied such relief.

In this case, the plaintiff won a $157,000 back pay award at trial for race discrimination and retaliation. The judge granted the plaintiff pre-judgment interest on that judgment, but denied a gross-up "[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."

The Ninth Circuit reverses in a brisk nine-page opinion. The panel concludes, following the other three circuits, that such awards may be made in the discretion of the district court judge: "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. We express no opinion on whether a gross up is appropriate here-that is for the district court to decide on remand."

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