Tuesday, November 24, 2015

Huge Tax Bill After Huge Back Pay Award? EEOC Provides Relief

Here’s the scenario: a federal employee prevails on an EEO complaint and as part of the relief is entitled to back pay.  Because EEO complaints can take several years to reach a final decision, it is not uncommon for back pay to total more than $100,000 when the dust settles.  The employee will receive that award as a lump sum; if as a result the employee’s income for that year has been pushed into a higher tax bracket, he or she will have to pay more tax than if the income had been earned as it should have been.  Can anything be done about this?

In fact, the EEOC takes the position 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. . . . an award to cover additional tax liability for receipt of back pay in a lump sum is available and [] a complainant bears the burden to prove the amount to which he claims entitlement.” Lonnie H. v. Postmaster General, EEOC Appeal No. 0120111230, 2015 WL 6689996, slip op. at *7 (October 22, 2015), citing Goetze v. Dep't of the Navy, EEOC Appeal No. 01991530 (Aug. 22, 2001); Holler v. Dep't of the Navy, EEOC Appeal Nos. 01982627 & 01990407 (Aug. 22, 2001).

The consequences of this principle – to both employees and the federal agencies that employ them – are significant.  In a recent case, we obtained a decision that the FAA had failed to accommodate an Air Traffic Controller, forcing him to retire in January 2010 rather than in September 2013, as he planned.  The EEOC’s Administrative Judge ordered the Agency to pay back pay, including premium and overtime pay, for the 3 years and nine months of his retirement, minus the annuities he received.  In other words, wages that would have been received over four years were received in a single tax year. The gross back pay, before deductions, exceeded $500,000, and the tax will be calculated at the highest tax rate applicable to both his federal and state returns.  It would not be surprising if the tax consequence in this instance approached $100,000.

The EEOC’s approach has become much more clear, and robust, over the past 6 months.  In Marlin K. v. Dep’t. of Homeland Security, EEOC Appeal No. 0120132637, 2015 WL 6957093 (October 30, 2015), after the Agency accepted the Administrative Judge’s decision finding discrimination and awarding back pay, the employee expressed to the Administrative Judge his concern with the potential back pay consequences.  The Administrative Judge did not modify the decision, and the employee appealed solely on the issue of his tax liability.  According to the Commission, “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.” 

Although in Marlin K. the employee had alerted the Agency and the Administrative Judge to his tax concerns prior to his appeal, the failure of the employee to raise these concerns prior to the Administrative Judge’s decision does not relieve the Agency of its liability.  In Lonnie H., above, the employee was awarded back pay for 5 years and other elements of relief.  Eventually, the employee filed an enforcement petition complaining that the Agency had failed to grant all of his relief, citing the impact of the increased tax burden.  The Agency disputed the employee’s contentions, and with respect to the tax burden, the Agency noted specifically that it had not been ordered to assume the employee’s tax liability and, thus, wasn’t responsible.  The Commission, however, did not adopt the Agency’s reasoning.  Rather, the Commission held that the employee had failed to meet his burden of proving whether he had an increased tax liability and, if so, the amount of that liability.  Specifically, “what Complainant was required to demonstrate was the amount of his tax liability had he been working during the relevant portions of tax years 2002 to 2007; the amount of his tax liability in tax year 2009 due to the lump sum payment; and the difference between those two figures. That dollar amount would represent his increased tax liability.” Lonnie H., slip op. at *8.

The Commission has clearly advised employees what they must do to meet their burden of proving increased tax liability. In Complainant v. Postmaster General, EEOC Request No. 0520150187, 2015 WL 3484628 (May 22, 2015), the employee prevailed on a discrimination claim but appealed the relief awarded by the Agency.  The Commission affirmed the Agency’s award, and denied the employee’s reconsideration request.  However, although the issue was not raised by the employee, the Commission added the following to its Order:
3. After the Agency has calculated and paid Complainant's back pay award, Complainant shall have sixty (60) calendar days following the end of the tax year in which the final payment is received to calculate the adverse tax consequences of any lump sum back pay awards, if any, and notify the Agency. Following receipt of Complainant's calculations, the Agency shall have sixty (60) days to issue Complainant a check compensating her for any adverse tax consequences established, with a written explanation for any amount claimed but not paid.
Id., slip op. at *3.

At this point, the Commission’s position is clear: anytime an employee receives a lump sum back pay award, by March 1 of the following year the employee must provide to the Agency any calculations indicating that the lump sum has resulted in a higher tax bill than would have been paid had the wages been received normally.  The employee may want to obtain professional assistance for these calculations, but the Agency is not obligated to reimburse any fees incurred in this process.  The Agency thereafter has 60 days to pay the increased burden, or explain in writing why any part of the calculation has been rejected.  Presumably, the employee can appeal this determination.  The employee is not required to raise this issue prior to receiving the lump sum.

Employers have long been required to provide “make whole” relief to victims of discrimination.  Now, “make whole relief” includes any increased tax liability resulting from the employee’s prevailing in the first place.

(On September 17, 2015, Representatives John Lewis (D-GA) and Jim Sensenbrenner (R-WI) introduced H.R. 3550, the Civil Justice Tax Fairness Act of 2015 (CJTFA). Senators Susan Collins (R-ME) and Ben Cardin (D-MD) introduced the Senate bill, S. 2059.  The bills would allow employees receiving lump sum awards to average their income through amended returns, paying the taxes retroactively for the relevant years.  This approach would eliminate the higher bracket in the year the lump sum is received and, presumably, save the employer from further reimbursing the employee for the tax liability.)

For more information about this post or how you can protect your rights, please contact George Chuzi.

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