May 25, 2001 Damages

Legislation Introduced To Limit Taxation Of Employment Discrimination Awards

On May 21, 2001, Sen. Susan Collins (R-Maine) introduced legislation to exclude from taxable income amounts received for employment discrimination claims. If enacted, the Civil Rights Tax Relief Act of 2001 (S. 917) would make judgments and settlements in discrimination cases, other than punitive damages and front pay and back pay awards, non-taxable. The legislation also would permit income averaging of such awards over the period of years the award is intended to cover, and would provide that the portion of any award paid as attorney’s fees would not be taxable to the plaintiff.

This legislation, which enjoys bipartisan support, is intended to reverse the effect of the Small Business Job Protection Act of 1996, under which damage awards not based on physical injury became fully taxable. Since employment discrimination claims typically involve claims of emotional, not physical, injury, the effect of the 1996 law was to make nearly all discrimination judgments and settlements taxable.

Although the advantage of such legislation to discrimination plaintiffs is self-evident, it would also provide an important benefit to employers. It is likely that many discrimination claims will be more easily settled if the settlement proceeds are not taxable to the plaintiff.