DISCLAIMER: I am NOT a licensed tax attorney. This Post is based solely upon my interpretation of the cases and statutes discussed herein. Seek out a tax professional if you require guidance as to any issue discussed below.
|I am NOT a Tax Expert!|
Since the enactment of the Small Business Job Protection Act of 1996, it is universally understood that awards or settlement paid to resolve employee claims brought under Title VII and its progeny (such as the with legislation prohibiting pregnancy, age, and disability discrimination (i.e. Pregnancy Discrimination Act of 1978, Age Discrimination in Employment Act, Americans with Disabilities Act of 1990, etc.) must be treated as ordinary income and are thus subject to ordinary taxes and withholding, i.e. must be paid under a W-2. That is so because such statutes provide that an employee may recover "back wages."
|Discrimination Awards and Settlements Taxable as Ordinary Income |
and Subject to W-2 Withholding
That is so because the FMLA provides that employees may not recover "back pay," but, rather, damages "equal to the amount of ... any wages, salary, employment benefits, or other compensation denied or lost to such employee by reason of the violation."
|Recovery Under FMLA Treated Differently|
In a 1998 decision, Churchill v. Star Enterprises, federal judge Harvey Bartle III engaged in a thorough analysis of the Internal Revenue Code before holding:
In deciding this pending motion, we do not pass on what, if any, taxes or FICA contributions plaintiff may owe on the monies received as a result of the judgment. See Schleier, 515 U.S. at 331, 115 S.Ct. 2159; United States v. Burke,
Since Churchill was decided, it has been called into question, but has never been overruled by any court of higher jurisdiction, such as the United States Court of Appeals for the Third Circuit, or the United States Supreme Court.
|Judge Bartle's 1998 Decision in Churchill |
Reaffirmed in July 2016 Decision
A July 2016 Decision by a Federal Judge in Philadelphia Holds That a Settlement Made on a Claim Brought Under the FMLA is NOT to be Treated as Ordinary Income Payable Under a W-2 and Should Instead be Paid as Miscellaneous Income Under a 1099
In Gunter v. Cambridge-Lee Industries, a decision rendered by federal Magistrate Judge Henry S. Perkins on July 14, 2016, the court analyzed Churchill and its progeny, before holding:
As such, after review of the two competing lines of cases regarding withholding, the Court finds Churchill and Carr and their emphasis on the unique language of the FMLA persuasive, distinguishing it from other employment statutes to be persuasive and will follow the holdings of those cases. We, therefore, hold that no withholding is required for the proceeds of the settlement in this case payable to the plaintiff.
At this point, it is fair to conclude that, until overruled, the rule announced in Churchill and reaffirmed in Gunter, is the law of the land -- at least in the Third Circuit -- judgments or settlements on claims made under the Family and Medical Leave Act should be paid out as miscellaneous income under a 1099, and not as wages subject to ordinary taxes and withholding paid under a W-2.
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John A. Gallagher is an employment lawyer who represents claimants in Pennsylvania.
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