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In the last issue of the Employment Advisory (see “Supreme Court to Look at Tax Treatment of Age Settlements”) we reported on Commissioner of Internal Revenue V. Schleier, a case pending before the United States Supreme Court which would resolve the issue of whether damages or settlements under the Age Discrimination in Employment Act were taxable as back wages, or excludable from gross income as personal injury damages as in Title VII and the Americans With Disabilities Act. On June 14, the Supreme Court issued its decision holding that ADEA damages and settlements are subject to income tax.

Although this holding results in different tax treatment for age damages than for damages for other types of discrimination, the Court justified this distinction by pointing out that the damages provisions of the ADEA are not based on Title VII, but rather on the Fair Labor Standards Act which regulates wages and hours. Unlike the Title VII scheme which includes backpay, compensatory and punitive damages, ADEA damages include only backpay and liquidated damages (typically a doubling of the backpay amount) for willful violations.

The Court reasoned that, with respect to the backpay portion of age awards, neither the plaintiff’s age nor the fact that his employment has been terminated can be characterized as a personal injury or sickness to justify excluding this amount from income. Further, the liquidated damages portion of age awards should be taxable according to the Court because they were intended to be punitive in nature.

The Schleier holding will certainly complicate settlement negotiations in age discrimination suits. The settlement value of age suits will undoubtedly be inflated as plaintiffs look for larger amounts in an effort to transfer the tax burden to the employer.