NLRB Requires Tax Gross-Up Relief in Back-Pay Cases

A unanimous, three-member decision by the NLRB in Latino Express, Inc. 359 NLRB No. 44, 2012 NLRB LEXIS 844 (Dec. 18, 2012), in a supplemental decision, held that a backpay award for income that would have been earned in a year(s) earlier than the year of payment must compensate the charging party for excess income tax liability and must require the employer to report a backpay allocation to the social security administration.  This landmark decision and the follow-on work by the board’s general counsel provide a road-map not only for counsel representing clients before the board, but also for counsel in discrimination and labor standards cases where courts order backpay relief or the parties settle backpay claims.  Moreover, as the decision construes the National Labor Relations Act, which was the model, in part, for Title VII, the board’s rationale may influence courts to recognize the propriety of “tax bump” or “tax gross-up” relief in discrimination and labor standards cases.  Indeed, it might even influence courts like the D.C. Circuit to reverse earlier holdings that, for example, Title VII does not permit tax bump/gross-up relief.  See, e.g. Fogg v. Gonzales, 492 F.3d 447 (D.C. Cir. 2007).

The Board’s decision requires that, where receipt of a lump-sum backpay award covering more than one calendar year pushes the recipient into a higher tax bracket, the affected employee should be compensated for the excess taxes.  The Board, in part, relies on those Federal Court decisions that, unlike the D.C. Circuit, have recognized the propriety of tax bump/gross-up relief.  See Sears v. Atchison, Topeka & Santa Fe Railway Co., 749 F.2d 1451, 1456 (10th Cir. 1984), cert. denied 471 U.S. 1099, 105 S. Ct. 2322, 85 L. Ed. 2d 840 (1985) (Title VII of the Civil Rights Act of 1964); O'Neill v. Sears, Roebuck & Co., 108 F.Supp.2d 443, 447 (E.D. Pa. 2000) (Age Discrimination in Employment Act); Powell v. North Arkansas College, 08-CV-3042, 2009 U.S. Dist. LEXIS 59773, 2009 WL 1904156 at *3 (W.D. Ark. 2009) (Family and Medical Leave Act).  

In addition, the board relies on an EEOC and a DOL administrative review board decision.  Van Hoose v. Pirie, No. 94-60050-N01, 2001 WL 991925 at *3 (EEOC Aug. 22, 2001); Doyle v. Hydro Nuclear Services, No. 99-041, 2000 WL 694384 at *8-10 (DOL Admin. Rev. Bd. May 17, 2000), revd. on other grounds sub nom. Doyle v. Secretary of Labor, 285 F.3d 243 (3d Cir. 2002), cert. denied 537 U.S. 1066, 123 S. Ct. 620, 154 L. Ed. 2d 555 (2002).  

The Board directs the General Counsel to prove and quantify the extent of any adverse tax consequences resulting from a lump-sum backpay award, requiring that the amount sought be specifically pled in the compliance specification.  The Board requires the general counsel to support the requested amount with evidence and a reasonable calculation.  

The Board, in noting that employers must withhold social security taxes from a discriminatee’s backpay award and remit that money to the government, together with the social security tax owed by the employer, noted an exception to this general rule.  Backpay owed by an employer that has never been an employer of the discriminate is not considered to be wages for FICA purposes, so there is no withholding obligation, and no employer contribution is payable.  Latino Express, 359 NLRB No. 44, 5 n.10.  Thus, for example, in failure to hire cases, there is no withholding obligation and no employer contribution requirement.  

Further, the Board required that backpay must be attributed to the proper periods for social security purposes.  If the backpay covers multiple years and is posted to the employee’s social security records in the year it is received, as the Board points out, there are several adverse consequences.  First, the individual may be deprived of social security credits and, accordingly, not have sufficient credits to cover for old-age social security benefits.  Second, when the contribution and benefit base is exceeded, the employer and employee do not pay tax on the excess, reducing the amount paid on the employee’s behalf.  Consequently, the employee’s eventual monthly benefit will be reduced.  Third, as social security benefits are calculated using a progressive formula, the rate of return diminishes at higher annual incomes, consequently a retiring backpay recipient can receive a smaller benefit when a multi-year award is posted to one year rather than being allocated to the appropriate periods, even if social security taxes were paid on the entire amount. 

Because of these potential adverse consequences, the Board held that it “shall now routinely require the filing of a report with the SSA allocating backpay awards to the appropriate calendar quarters.”  The Board requested that the General Counsel develop a standard form that will “simply and efficiently elicit the information the SSA requires…”

The Board’s requirements regarding the filing of a report with the Social Security Administration allocating backpay to appropriate calendar quarters would seemingly be good practice for parties in negotiating settlements of backpay claims.  In addition, seemingly the federal district courts and state courts should be entering remediation orders that include a requirement of such a filing.  

A sample calculation of a gross-up, as well as a selection of scholarly articles on the subject, follows after the jump.

Pages from Tinari Report by Robert B. Fitzpatrick

A great deal of scholarship has been created on the topic of how to calculate the correct gross-up, and the impact of tax liability and lump-sum settlement awards on employees.  Below are a selection of this scholarship:

• Robert W. Wood, To Tax Gross Up Or Not To Tax Gross Up?, 19 California Tax Lawyer 1 (Winter 2010)
• Richard Barca, Taxing Discrimination Victims: How the Current Tax Regime is Unjust and Why a Hybrid Income Averaging and Gross Up Remedy Provides the Most Equitable Solution, Rutgers J. L. & Pub. Pol., Vol. 8:4 (Spring 2011)
• Tim Canney, Comment: Tax Gross-Ups: A Practical Guide to Arguing and Calculating Awards for Adverse Tax Consequences in Discrimination Suits, 59 Cath. U.L. Rev. 1111 (2010)
• Kristin K. Kucsma & Frank D. Tinari, A Revised Appraisal of Economic Loss, Tinari Economics Group (March 29, 2011)
• Geoffrey D. Mueller, Note: The Federal Income Tax Consequences of States’ Laws Against Discrimination: Why Blaney was Right and Why New Jersey’s Law Against Discrimination Should Be Amended, 29 Seton Hall Legis. J. 603 (2005)
• Thomas R. Ireland, Tax Consequences of Lump Sum Awards in Wrongful Termination Cases, Journal of Legal Economics 17(1): pp51-73 (2010)
• Gregg D. Polsky & Stephen F. Befort, Employment Discrimination Remedies and Tax Gross Ups, University of Minnesota Law School, Legal Studies Research Paper Series, No. 04-10 (2010)
• Douglas E. Arone, Employer’s Liability for the Tax Consequences of a Judgment, Gibbons PC, The Employment and Labor Law Alert (Feb. 13, 2004)
• Erik Cheverud, Note: Increased Tax Liability Awards After Eshelman: A Call for Expanded Acceptance Beyond the Realm of Anti-Discrimination Statutes, 57 N.Y.L. Sch. L. Rev. 711 (2011/2012)

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