Lump Sum Damages: What Happens to Employers?

Although the liability finding certainly inured to Ferrante's favor, the tax consequences of the lump sum award did not. As a result of the jury's award, Ferrante would wind up owing more taxes than if she had not been harassed in the first place. In other words, the tax laws would result in Ferrante's netting less money than if she were able to remain on the job and pay her taxes normally. Ferrante sought to remedy this inequity by seeking a post-judgment ruling that her former employer was responsible for offsetting the higher taxes that she would have to pay.

At the outset of its opinion, the trial court noted that plaintiff's application, and the issue it raised, had never before been decided by a New Jersey court. The court began its analysis by examining the framework of the New Jersey Law Against Discrimination (LAD), which has as its goal the eradication of discrimination. The court then considered the purpose behind awarding compensatory damages, which was to restore the injured party to the position he or she occupied prior to the injury. These two factors led the court to conclude that the LAD should be both liberally construed and broadly applied.

The Trial Court's Findings

The trial court in Ferrante also found persuasive the holdings of two cases from outside of New Jersey that had addressed the same issue. In O'Neill v. Sears, Roebuck & Co., 108 F. Supp. 443 (E.D. Pa. 2000), the court recognized that the anti-discrimination law at issue there (the ADEA) was designed to allow the plaintiff to keep the same amount of money as if there had been no unlawful discrimination. That goal, according to the O'Neill court, required reimbursement for 1) the higher taxes that were owed on back wages that were awarded in the form of a lump sum, and 2) the reduced amount of front pay that the plaintiff had to invest as a result of higher taxes on the present value of the earnings.

In addition, the Ferrante court relied on the rationale of the appellate panel in Blaney v. International Assoc. of Machinists and Aerospace Workers, 114 Wash. App. 80 (Ct. App. Wash. 2002), which also considered a similar question. In Blaney, the Washington Court of Appeals concluded that the adverse federal income tax consequences that were triggered by the payment of the judgment meant that the plaintiff was, in effect, sharing her award with the Internal Revenue Service. The Blaney court further held that without judicial relief, the negative tax implications would preclude a plaintiff from being made whole, which is the purpose of compensation under that state's anti-discrimination statute.

The Ferrante court concluded its analysis by returning to the LAD. Noting that the legislature mandated that the statute's damage provision was to be liberally construed, and acknowledging the “make whole” policies behind the statute, the court ruled in plaintiff's favor: Ferrante's former employer was required to compensate her for the negative tax consequences of receiving the lump sum award. Inasmuch as plaintiff's expert opined that the negative tax impact of the jury's award was $107,000 and defendants offered no rebuttal expert of their own, the trial court modified the judgment to reflect that increased sum.

What It Means

The Ferrante court made clear, however, that calculating the negative tax consequences of an award is not something that is readily discernible by the jury, in part because the amount of the award is unknown until the verdict. In the court's estimation, the jury simply does not have the expertise to ascertain the tax liability on its award. Ferrante holds that negative tax calculations require expert testimony, and that post-trial motions are the appropriate mechanism for resolving that issue.

Because Ferrante is a trial court opinion, it is of no precedential value in New Jersey. However, it is presently the only opinion of its kind in the state, and as such, is likely to be cited by plaintiffs' counsel as justification for obtaining additional damages in every case where the their client won at trial and received a lump sum award of economic damages that had negative tax consequences. Ferrante was not appealed, and unless and until a contrary ruling is issued by New Jersey's Supreme Court or Appellate Division, employers in New Jersey certainly need be mindful that the successful discrimination plaintiff now has a new tool which has the potential to increase greatly the amount of damages which he or she could be awarded.

Employers, however, should not think that this tool is limited only to discrimination verdicts issued in the state courts in New Jersey or Washington, or one federal court in the Eastern District of Pennsylvania. A small number of other courts throughout the United States have considered whether employers should be responsible for the negative tax consequences arising from a lump sum award of damages, and that list can be expected to grow as news of Ferrante is circulated among the plaintiffs' bar. Several of these courts have either ruled in favor of the plaintiff or left open the possibility that such damages could be awarded if the plaintiff presents sufficient evidence of negative tax liability.

Strategies

A number of strategies exist to defend against a post-trial motion seeking additional damages. For one, defense counsel should research and analyze the anti-discrimination statute at issue to determine whether the damages provision in the statute allows for such an award. Employers also may wish to consider retaining an expert, one well-versed in the tax laws, to opine that the negative tax liability is not as great — or better yet, is nonexistent — as the plaintiff's expert claims. And in the event plaintiff has not offered his or her own expert testimony, that is powerful ammunition for the employer to argue that the court should not award any extra damages. Without such expert testimony, such an award would be entirely speculative.

Relief ultimately may come from the legislature. The Civil Rights Tax Relief Act of 2003, introduced last March, would alleviate the adverse tax consequences presently facing the successful discrimination plaintiff. That bill would, among other things, allow income averaging for back and front pay awards over the number of years the award represents, and permit individuals to pay taxes at the same marginal rate that would have applied had there been no discrimination and lawsuit. The bill, which has the backing of a number of groups, including the U.S. Chamber of Commerce, has not yet been reported out of committee. Passage of this proposed legislation would eliminate any adverse tax consequences of a lump sum discrimination award, and therefore, obviate the need for any enhanced damages in the post-trial phase of the case.

More often than not, it is the defendant who brings the post-trial motions that follow a jury finding that an employer is liable for employment discrimination. Those motions normally seek, among other things, a new trial, a judicial determination that the evidence did not support the verdict, and/or a remittitur of the damages awarded. Less common are substantive motions brought by the victorious plaintiff, such as a motion for additur, where a damages award larger than that assessed by the jury is sought. That may soon change, as victims of discrimination, bolstered by a new trial court decision from New Jersey, may seek to hold their employer responsible for any increased taxes that he or she may have to pay as a result of winning at trial. Such a tactic has the potential to increase greatly — perhaps into six figures — the amount of damages for which the employer found to have discriminated may be liable.

Ferrante v. Sciaretta

In Ferrante v. Sciaretta, N.J. Super. __ (N.J. Law Div. Aug. 14, 2003) (approved for publication, Dec. 5, 2003), the jury returned a verdict in favor of plaintiff Mary Ferrante on her sexual harassment and hostile work environment claims. The jury also found that Ferrante had been constructively discharged. She was awarded $340,659 in economic damages, which included back and front pay. The jury awarded those economic damages in the form of a lump sum payment.

Although the liability finding certainly inured to Ferrante's favor, the tax consequences of the lump sum award did not. As a result of the jury's award, Ferrante would wind up owing more taxes than if she had not been harassed in the first place. In other words, the tax laws would result in Ferrante's netting less money than if she were able to remain on the job and pay her taxes normally. Ferrante sought to remedy this inequity by seeking a post-judgment ruling that her former employer was responsible for offsetting the higher taxes that she would have to pay.

At the outset of its opinion, the trial court noted that plaintiff's application, and the issue it raised, had never before been decided by a New Jersey court. The court began its analysis by examining the framework of the New Jersey Law Against Discrimination (LAD), which has as its goal the eradication of discrimination. The court then considered the purpose behind awarding compensatory damages, which was to restore the injured party to the position he or she occupied prior to the injury. These two factors led the court to conclude that the LAD should be both liberally construed and broadly applied.

The Trial Court's Findings

The trial court in Ferrante also found persuasive the holdings of two cases from outside of New Jersey that had addressed the same issue. In O'Neill v. Sears, Roebuck & Co. , 108 F. Supp. 443 (E.D. Pa. 2000), the court recognized that the anti-discrimination law at issue there (the ADEA) was designed to allow the plaintiff to keep the same amount of money as if there had been no unlawful discrimination. That goal, according to the O'Neill court, required reimbursement for 1) the higher taxes that were owed on back wages that were awarded in the form of a lump sum, and 2) the reduced amount of front pay that the plaintiff had to invest as a result of higher taxes on the present value of the earnings.

In addition, the Ferrante court relied on the rationale of the appellate panel in Blaney v. International Assoc. of Machinists and Aerospace Workers , 114 Wash. App. 80 (Ct. App. Wash. 2002), which also considered a similar question. In Blaney, the Washington Court of Appeals concluded that the adverse federal income tax consequences that were triggered by the payment of the judgment meant that the plaintiff was, in effect, sharing her award with the Internal Revenue Service. The Blaney court further held that without judicial relief, the negative tax implications would preclude a plaintiff from being made whole, which is the purpose of compensation under that state's anti-discrimination statute.

The Ferrante court concluded its analysis by returning to the LAD. Noting that the legislature mandated that the statute's damage provision was to be liberally construed, and acknowledging the “make whole” policies behind the statute, the court ruled in plaintiff's favor: Ferrante's former employer was required to compensate her for the negative tax consequences of receiving the lump sum award. Inasmuch as plaintiff's expert opined that the negative tax impact of the jury's award was $107,000 and defendants offered no rebuttal expert of their own, the trial court modified the judgment to reflect that increased sum.

What It Means

The Ferrante court made clear, however, that calculating the negative tax consequences of an award is not something that is readily discernible by the jury, in part because the amount of the award is unknown until the verdict. In the court's estimation, the jury simply does not have the expertise to ascertain the tax liability on its award. Ferrante holds that negative tax calculations require expert testimony, and that post-trial motions are the appropriate mechanism for resolving that issue.

Because Ferrante is a trial court opinion, it is of no precedential value in New Jersey. However, it is presently the only opinion of its kind in the state, and as such, is likely to be cited by plaintiffs' counsel as justification for obtaining additional damages in every case where the their client won at trial and received a lump sum award of economic damages that had negative tax consequences. Ferrante was not appealed, and unless and until a contrary ruling is issued by New Jersey's Supreme Court or Appellate Division, employers in New Jersey certainly need be mindful that the successful discrimination plaintiff now has a new tool which has the potential to increase greatly the amount of damages which he or she could be awarded.

Employers, however, should not think that this tool is limited only to discrimination verdicts issued in the state courts in New Jersey or Washington, or one federal court in the Eastern District of Pennsylvania. A small number of other courts throughout the United States have considered whether employers should be responsible for the negative tax consequences arising from a lump sum award of damages, and that list can be expected to grow as news of Ferrante is circulated among the plaintiffs' bar. Several of these courts have either ruled in favor of the plaintiff or left open the possibility that such damages could be awarded if the plaintiff presents sufficient evidence of negative tax liability.

Strategies

A number of strategies exist to defend against a post-trial motion seeking additional damages. For one, defense counsel should research and analyze the anti-discrimination statute at issue to determine whether the damages provision in the statute allows for such an award. Employers also may wish to consider retaining an expert, one well-versed in the tax laws, to opine that the negative tax liability is not as great — or better yet, is nonexistent — as the plaintiff's expert claims. And in the event plaintiff has not offered his or her own expert testimony, that is powerful ammunition for the employer to argue that the court should not award any extra damages. Without such expert testimony, such an award would be entirely speculative.

Relief ultimately may come from the legislature. The Civil Rights Tax Relief Act of 2003, introduced last March, would alleviate the adverse tax consequences presently facing the successful discrimination plaintiff. That bill would, among other things, allow income averaging for back and front pay awards over the number of years the award represents, and permit individuals to pay taxes at the same marginal rate that would have applied had there been no discrimination and lawsuit. The bill, which has the backing of a number of groups, including the U.S. Chamber of Commerce, has not yet been reported out of committee. Passage of this proposed legislation would eliminate any adverse tax consequences of a lump sum discrimination award, and therefore, obviate the need for any enhanced damages in the post-trial phase of the case.