There is good news for employers and employees seeking to lower costs in resolving employment disputes. On October 22, 2004, President George W. Bush signed into law a sweeping piece of legislation entitled the American Jobs Creation Act of 2004 (the “Act”), that is intended to make it easier and less expensive to settle employment discrimination suits.
Section 703 of the Act modifies section 62 of the Internal Revenue Code to provide an “above-the-line” deduction for attorney fees and court costs paid by or on behalf of a taxpayer “in connection with any action involving a claim of unlawful discrimination.” In other words, attorney fee awards in discrimination suits will no longer be included in a plaintiff’s gross income. While settlement amounts must still must be reported as income, plaintiffs will now receive an offsetting dollar for dollar federal tax deduction for any attorneys’ fees or court costs paid in resolving discrimination suits. The deduction only applies to such fees and costs for any settlement or judgment occurring after October 22, 2004 and cannot exceed the taxpayer’s gross income for that taxable year.
Prior to the Act, a successful plaintiff in a discrimination case could not subtract the cost of attorneys’ fees and court costs from his or her gross income, but instead had to deduct such costs as a miscellaneous “below-the-line” itemized deduction. Itemized deductions are subtracted after gross income is adjusted and are subject to an alternative minimum tax or a two-percent floor. Consequently, prior to the Act, this tax treatment was often an obstacle to settlement negotiations, causing plaintiffs to seek higher settlement amounts to offset income tax consequences. From the employer’s perspective, the Act should simplify settlement negotiations and make settlements less costly because the parties will no longer have to consider the plaintiff’s tax consequences for attorneys’ fees and court costs paid as part of the judgment or settlement.
The deduction granted under the Act can be used for claims that are brought under:
- Title VII of the Civil Rights Act of 1964;
- National Labor Relations Act;
- Fair Labor Standards Act;
- Age Discrimination in Employment Act of 1967;
- ERISA;
- Employee Polygraph Protection Act of 1988;
- Worker Adjustment and Retaining Notification Act;
- Family Medical Leave Act;
- Americans with Disabilities Act of 1990;
- any federal whistleblower law; and
- any federal, state, or local law, or common law claims for the “enforcement of civil rights” or “regulating any aspect of the employment relationship.”
For more information on this topic, please contact either Alan Rauss at amr@kjk.com or 216-736-7221, Rob Gilmore at rsg@kjk.com or 216-736-7240, or Todd Burger at tmb@kjk.com or 216-736-7201.