Glimpses - Taxing Settlements

It won't change anything for employers but today's (9/15/09) federal register includes a notice from the IRS that it is amending the regulations that govern taxation of damages received on account of personal physical injuries or physical sickness. It only took the IRS thirteen years.

Before 1996, there was an argument, weakened by United States v. Burke, 504 U.S. 229 (1992), that settlements (and jury awards) in employment discrimination claims were not taxable. Burke held that a back pay award under the pre-1991 version of Title VII of the 1964 Civil Rights Act was not excluded from income but rested its conclusion on the type of damages that could be awarded in a Title VII suit (at that time). The decision caused more confusion than it resolved leading to later Court decisions and, ultimately, led Congress to close the discrimination "loophole" in 1996. Now, to be excluded from gross income, the settlement must be for personal physical injuries or physical sickness, emphasizing the "new" (as of 1996) changes. That exclusion (from income) effectively includes most every amount paid to settle a discrimination or retaliation claim. The IRS is now getting around to eliminating language from its regulation that was obsolete in 1996.

Most employers probably don't care whether the amount paid to an employee is taxable income to the employee. Be assured that employees do. Virtually every time I settle a discrimination or retaliation claim, the other lawyer asks me whether the settlement amount is taxable. Most have caught on that it is but they just want to make sure they haven't missed any recent change on this front.

They have good reason to ask, I suppose. Every Congress since 2001, has had introduced a bill that would permit parts of a discrimination settlement to be excluded from income. H.R. 3035 is the current iteration. It would exclude emotional distress damages in discrimination but would still tax back pay and punitive damages. It would permit employees to average the back pay damages over the period covered by the lawsuit or settlement.

EEOC Compliance Manual on Religious Discrimination

On July 22, 2008, the EEOC issued a press release proclaiming that it has issued "COMPLIANCE ASSISTANCE ON RELIGIOUS DISCRIMINATION” (Why the EEOC must use all caps in its press releases is a mystery.)

I've discussed religious employment discrimination issues in a prior posting. There, I reported on a North Carolina federal appeals court decision where the EEOC wanted the employer to waive the employer's neutrally and consistently applied attendance policy for an employee whose religious prohibited working on a Saturday. The EEOC Compliance Manual leaves no doubt that it continues to disagree with the court's decision. I won't repeat that discussion here.

Because of a recent lawsuit (in which I have no involvement) in the news, I was curious to see how the manual addressed the religious clothing issues. The manual is an utter disaster. It provides neither employees nor employers with coherent guidance on when an employer must permit, despite a dress code or uniform requirement, religious dress. The EEOC's ambiguous statements are as follows:

"religious discrimination may be found where an employer fails to accommodate the employee’s religious dress or grooming practices" - no doubt true, but the statement is far too vague to be of any help.

"Some courts have concluded that it would pose an undue hardship if an employer was required to accommodate a religious dress or grooming practice that conflicts with the public image the employer wishes to convey to customers." So what is the EEOC's position? All it then says is: "While there may be circumstances in which allowing a particular exception to an employer’s dress and grooming policy would pose an undue hardship, an employer’s reliance on the broad rubric of 'image' to deny a requested religious accommodation may in a given case be tantamount to reliance on customer religious bias (so-called 'customer preference') in violation of Title VII." There is no explanation whatsoever as to how an employer should decide whether their public image permits them to assert the accommodation would be an "undue hardship." The example the EEOC gives (customers might fear a worker is a terrorist for wearing a hijab (head scarf)) is so obvious it is laughable.

The final sentence of this section: "There may be limited situations in which the need for uniformity of appearance is so important that modifying the dress code would pose an undue hardship. However, even in these situations, a case-by-case determination is advisable."

We are a diverse country and, compared to most (even some "western" countries), remarkably tolerant of each other's religious views (not that further improvement wouldn't be welcome). That diversity and tolerance carries with a price. For employers, that price includes making unpopular and/or difficult decisions. More so than with any other protected class, religious employment discrimination issues force someone to compromise a principle. Given what is at stake, employers and employees deserved to receive much clearer guidance on this point from the EEOC.