AGENCY CAN BE ORDERED TO PAY EMPLOYEE INCOME TAXES
When the employer is ordered to give an employee a back pay lump sum amount, it can also be required to compensate the employee for any extra income taxes if the employer’s improper action was based on illegal civil rights discrimination. This underscores why it is important to allege discrimination if there is any chance of it.
EEOC described an employee’s right to have management pay his or her extra tax liability related to a lump sum payment in this 2005 case.
The Commission has held that where an agency pays back pay and other income payments in a lump sum payment the agency is responsible for a petitioner’s proven increased income tax burden. . . .We find, therefore, that the agency is liable to petitioner for proven adverse federal income tax consequences as a result of its lump sum payments to petitioner in 1998 and 1999. Petitioner will have the burden of establishing the amount of her increased federal income tax liability to the agency. Teresita D. Lorenzo, EEOC-OFO, Appeal No. 01944324 (2005)
But, do not expect the EEOC or an arbitrator acting with the same power as EEOC to order an agency to pay extra taxes flowing from any compensatory damages the employee receives, e.g., for emotional stress caused by manager’s improper action.
As regards the issue of taxation, we note that while an award to cover additional tax liability from a lump sum payment of back pay is available to complainants, . . . the Commission has not recognized any entitlement to awards to cover tax liability for compensatory damages. In Williams v. Department of Veteran’s Affairs, EEOC Petition No 040040047 (June 30, 2005) the Commission found that: in a case of a lump sum back pay award, individuals are compensated for the extra tax they are required to pay as a result of receiving a lump sum award, as opposed to the actual amount they would have had to pay if they had received the pay over a period of time, usually several years. It is the receipt of the pay in one lump sum that causes the extra tax liability, not the back pay award itself. The petitioner is still required to pay taxes. In the case of compensatory damages and interest, there is no option to receive partial payments over time. Thus, there are no additional negative tax consequences to awards of compensatory damages and interest, and, therefore, no entitlement to compensation for such additional negative tax consequences. Raul Rodriguez, Complainant, EEOC-OFO, Appeal No. 0720080064 (2009)
(This post originally appeared six years ago, just a few months after FEDSMILL went online.)