police carsIn labor and employment law cases, a successful plaintiff may be entitled to monetary damages including several years of front pay and/or back pay, in addition to other economic and non-economic damages. But what are the tax implications for a plaintiff who receives such a lump sum award?

Judge Says Defendants Must Compensate Plaintiffs for “Negative Tax Consequences”

A New Jersey federal judge recently confronted this issue in the context of a dispute between Jersey City and a group of its retired police officers. The former officers sued the City, its mayor, and its police department, alleging they were improperly denied promotions from sergeant to lieutenant due to their “political affiliation.” Following a trial, a jury agreed the city defendants violated the New Jersey Law Against Discrimination (NJLAD) and awarded damages.

The jury ruled in favor of the plaintiffs and awarded them economic damages. These damages essentially reflected the plaintiffs' economic losses–i.e., the money they would have earned had the City not denied their promotions to lieutenant.

After the jury returned its verdict, the plaintiffs filed a motion to “offset the negative tax consequences of a lump-sum award,” a process known as “molding the verdict.” The defendants opposed the motion. But in an order dated July 23, 2018, U.S. District Judge Stanley R. Chesler granted the plaintiffs’ application.

In so holding, Judge Chesler pointed to a published 2009 decision by the Appellate Division of the New Jersey Superior Court, which held the NJLAD was designed to make a victim of discrimination whole for his or her losses, and therefore a “defendant is called upon to compensate a plaintiff for the negative consequences of receiving a lump sum award of economic damages.” Although the Jersey City defendants noted this decision was not binding precedent on the federal court, Judge Chesler opined it was still instructive, especially since the New Jersey Supreme Court has not ruled to the contrary.

How Will This Affect New Jersey Employers Going Forward?

If the reasoning relied upon by Judge Chesler is more broadly adopted, it could represent a significant increase in an employer's potential liability for NJLAD violations.

For more information regarding the implications of this case or labor and employment inquiries, please contact Nicole Grzeskowiak at ngrzeskowiak@hoaglandlongo.com or call 732.545.4717.