Federal Appeals Court Holds Employer Paying Award under Title VII for Back or Front Pay Must Make Deductions for Income and FICA Taxes

By Andrew M. Moskowitz, Esq.
amoskowitz@pashmanstein.com

Ian Noel was terminated in 2005 from his job at the Central New York Psychiatric Center.  Mr. Noel alleged that his termination was in retaliation for his cooperation with an investigation into racial discrimination and therefore in violation of Title VII of the Civil Rights Act of 1964.  A jury ruled in his favor and, after an appeal, Mr. Noel obtained a judgment against his former employer, the State of New York, for $318,217.48.  Of this amount, $280,000 was for back and front pay.

In issuing payment to Mr. Noel for the back and front pay portion of the judgment, the State of New York made deductions for state and federal income tax, Medicare, and Social Security.  It also deducted $8,400 for a “retirement contribution” and $19.06 for union dues.  Noel objected to these deductions and asked that the lower court require the State to pay him the full dollar amount of the judgment.  After the lower court granted Mr. Noel’s application, the State appealed.

In Noel v. New York State Office of Mental Health (2d Cir. Aug. 31, 2012), the Second Circuit Court of Appeals—which covers federal district courts in New York, Connecticut and Vermont—held that the State of New York was correct to withhold money for federal and state income taxes as well as Federal Insurance Contributions Act (“FICA”) taxes.  Indeed, the Court held that, because payments made pursuant to Title VII awards for back or front pay are wages as defined under the Internal Revenue Code, such deductions are mandatory.   However, the Court held that, in withholding monies for retirement contributions and union dues, the employer in Noel erred.

Under Title VII, an employee is entitled to recover back wages and benefits—known as back pay— as well as an award for future lost wages and benefits, which is called front pay.  The Court stated that it had “little difficulty” in reaching the conclusion that both back pay and front pay are “wages” as defined by the Internal Revenue Code.  The Court rejected the argument that the award should not be considered wages because it was not for services actually performed by an employee.  The Court noted that both back and front pay “are remuneration paid to an employee to compensate for what he would have earned had he not been the victim of discrimination.”  Therefore, the Court concluded that these amounts constitute wages.

The only conclusion that employers in New York, Connecticut and Vermont can draw from the Noel opinion is that, in instances in which a former employee alleges an entitlement to lost wages due to a violation of Title VII of the Civil Rights Act of 1964, any settlement of such a claim must make deductions for income and FICA taxes.

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