The successful plaintiff, in an employment discrimination case, has to pay taxes on past and future wage loss (back and front pay) and emotional distress damages (non-economic damages). In Blaney v. International Association of Machinists and Aerospace Workers, the Washington Supreme Court allowed successfully parties, in a claim under the Washington Laws Against Discrimination (WLAD) to “gross up” their damages award to include taxes that have to be paid on that award. Before Blaney, the Federal Courts, in Title VII claims, allowed plaintiffs to “gross up” their damages awards to offset the potential tax implications associated with the award of back and front pay but not to offset the tax consequences associated with the award of emotional distress/non-economic damages. After Blaney, it was assumed that Washington Supreme Court decision extended to wage loss and emotional distress damages.
In Pham v. City of Seattle, the Washington Supreme Court held that, in claims under the WLAD, successful plaintiffs are only entitled to enhance their damage award to take into account the adverse tax consequences associated with any wage loss award but not for the tax consequences associated with the award of emotional distress damages. The court reasoned that non-economic damages are inherently different from wage loss and, therefore, the court left it to the legislature to decide whether there should be tax offsets for non-economic damages.
The Bottom Line: The legislature created the WLAD and gave a directive that it be “liberally construed.” It would not surprise this author to see legislative efforts to require courts to increase damages awards to take into account the tax implications associated with an award of non-economic damages. Even though the court in Pham narrowed the Blaney decision, the net effect is that employers could be left having to pay a premium of up to 35% extra for any wage loss award given to the plaintiff. Employment discrimination cases are high risk cases. Jurors tend not to be sympathetic to employers and, as a consequence, the awards tend to be high. This by itself should strengthen your company’s resolve to have effective policies and procedures for handling complaints of discrimination.
Nothing in this blog should be considered legal advice or to form an attorney client relationship. The information provided is general in nature. Nothing can substitute for a consultation with a legal professional who can address your particular legal concern.