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Court Grants Additional Compensation To Plaintiff To Offset Tax Liability

Published by on April 17, 2009

In Eshelman v. Agere Systems, Inc., the U.S. Court of Appeals for the Third Circuit held that a trial court has discretion in granting additional compensation to offset tax liability in back pay awards.  More after the break. After being employed by Agere Systems, Inc. (“Agere”) for 17 years, Eshelman was diagnosed with breast cancer […]

In Eshelman v. Agere Systems, Inc., the U.S. Court of Appeals for the Third Circuit held that a trial court has discretion in granting additional compensation to offset tax liability in back pay awards.  More after the break.

After being employed by Agere Systems, Inc. (“Agere”) for 17 years, Eshelman was diagnosed with breast cancer and had to take a leave of absence.  Upon returning to work, she disclosed to Agere that she was suffering from short-term memory loss due to the chemotherapy treatment.  A few months later, she informed her supervisors that she was worried about having to drive to unfamiliar places as a result of her memory loss, which she sometimes had to do as part of her job.  Despite the problems with her memory, Eshelman received very high performance ratings, including a promotion.  In 2001, Agere began a company-wide reduction in force.  Initially, Eshelman was not identified as one of the employees to be laid off.  Eshelman’s supervisors had a discussion with her about the possibility of a transfer to a different Agere facility, during which Eshelman expressed reservations about driving to new locations.  Subsequently, Eshelman was placed in the pool of potential candidates for the lay-off, and was eventually laid off at the end of that year.  

Eshelman filed a complaint against Agere, alleging that she was discriminated against based on her age and disability.  Eshelman claimed, among other things, that Agere terminated her because she was regarded as being disabled, and because she had a record of a disability.

Following a jury trial, Eshelman was awarded $170,000 in back pay and $30,000 in compensatory damages after the jury found that Agere had discriminated against her based on her disability.  Agere made a motion for judgment as a matter of law, and in the alternative, a motion for a new trial.  Eshelman filed a motion in opposition and also made a motion for additional compensation to offset the tax consequences of her back pay award.  The district court denied Agere’s motion for judgment as a matter of law and granted Eshelman’s motion for additional compensation.

Regarding Eshelman’s motion for additional compensation to offset the tax consequences of her back pay award, the Third Circuit held that a trial court has discretion to augment such an award to compensate for tax liability.  The court cited the remedial purpose behind statutes like the ADA as the basis for its conclusion, and pointed to the practice of awarding prejudgment interest on back pay awards as additional support. 

In holding that a trial court has discretion to augment back pay awards, the Third Circuit became one of the few courts to have addressed this issue and contributed to the already-forming circuit split on the issue.  In Sears v. Atchison, Topeka & Santa Fe Railway Co., the Tenth Circuit took a similar approach and held that a district court has discretion to account for tax liability in computing back pay awards.  Sears v. Atchison, Topeka & Santa Fe Ry. Co., 749 F.2d 1451 (10th Cir. 1984).  In contrast, in Fogg v. Gonzales, the District of Columbia Circuit reversed the trial court’s grant of additional compensation to offset the tax consequences of a back pay award.  Fogg v. Gonzales, 492 F.3d 447 (D.C. Cir. 2007).  Similarly, in Hukkanen v. International Union of Operating Engineers, the Eighth Circuit held that the district court’s denial of additional compensation for tax liability was not an abuse of discretion.  Hukkanen v. Int’l Union of Operating Eng’rs, 3 F.3d 281 (8th Cir. 1993). 

Contributed by Claudia L. Guzman

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