Charging the Victim

Uncle Sam has been known to tax students on their college fellowships. Sometimes he’s even taxed people who earn pocket change from their hobbies.

Recently, the government has been taking a big bite out of jury awards and court settlements won by workers who suffered sexual harassment or other forms of employment discrimination.

The tax, which has received little notice, is eating up a good portion of the monetary damages awarded to harassment victims, attorneys say.

Now lawyers for plaintiffs and employers are supporting a congressional effort to abolish the tax.

“Some injured workers are being punished twice, first by their employer and then by the IRS,” said Paula Brantner, an attorney for a national lawyers group that advocates the tax repeal.

The tax became effective nearly two years ago when President Clinton signed the Small Business Job Protection Act of 1996, which increased the federal minimum wage.

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Included in the law was a provision taxing all court awards “not based on physical injuries or physical sickness.”

This meant that the majority of employment discrimination awards, which typically cover back wages or emotional damage, would be reduced by taxes.

At the time, lawmakers argued that discrimination awards were substitutes for wages and should be taxed as income.

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Nancy Bornn, a Santa Monica attorney who represents harassment plaintiffs, said the provision “makes no sense.”

“If you get in a car accident, get hurt and suffer emotional distress, the IRS will leave you alone,” Bornn said. “But if you suffer emotional damages from being harassed, you’ve got to pay up. That’s twisted.”

That’s not all. Victims are also taxed on the portion of the awards paid to their attorneys, who are then taxed on their share as well.

A 44-year-old Riverside County woman who recently settled a gender discrimination claim against an Orange County firm for $100,000 said she received only $38,000--after paying attorney’s fees and taxes.

“It’s totally unfair that the government should make out so well because of the injury I suffered,” said the woman, who asked that her name not be used because her settlement was confidential.

Brantner, an attorney with the National Employment Lawyers Assn., a group of plaintiffs’ attorneys based in San Francisco, said the IRS is turning out to be the biggest winner in many employment discrimination cases.

In a hypothetical example cited by Brantner, a mother of two who wins a $225,000 settlement would take home $80,719 while her attorney would get $46,691. The Internal Revenue Service, however, would snare $97,590.

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Attorneys who represent workers say the tax is making it more difficult to settle cases.

“This tax is bad for businesses and bad for victims,” said Don D. Sessions, a Mission Viejo lawyer who represents employees in labor disputes. “Courts are going to be clogged with these cases because employees no longer have any incentives to settle.”

Tim Harris of Charlston, Revich & Williams in Century City noted that two years ago, shortly before the tax became law, he settled two harassment suits for about $500,000 each.

“Settling those same cases will be a lot tougher today because plaintiffs are holding out for bigger numbers after they calculate what their taxes will be,” said Harris, who defends employers in labor disputes.

“I don’t think this is what Congress had in mind when they wanted to make it easy for victims to sue and thereby police the workplace.”

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An American Bar Assn. committee representing the interests of employers, labor groups and individual plaintiffs recently asked House Ways and Means Chairman Bill Archer (R-Texas) to support separate bills by Reps. Gerald Solomon (R-N.Y.) and Barney Frank (D-Mass.) that would repeal the tax.

“We often find ourselves on different sides of the same issue,” the letter from the ABA’s Equal Employment Opportunity Committee states, “[but] we fully agree that repeal of this tax would serve employers and workers alike.”

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Winner Takes Less

As the result of a 1996 law, court awards in employment discrimination and sexual harassment suits are considered a substitute for wages and are taxable. How a hypothetical $225,000 award would be divided:

Attorney: $46,691

Internal Revenue Service: $97,590

Plaintiff: $80,719

Source: Times research