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Federal Appeals Court Approves 'Grossing Up' of Back Pay Award for Laid Off Employee 'Regarded As' Disabled

February 20, 2009

The U.S. Court of Appeals for the Third Circuit recently issued a decision that is significant on two fronts. First, the court found that an individual with short-term memory loss resulting from chemotherapy treatment may be “disabled,” or regarded as disabled,” and therefore covered by the Americans with Disabilities Act. Additionally, the Third Circuit, deepening a split among the federal appeals courts, ruled that a trial judge may augment (“gross up”) a back pay award to offset additional taxes that the plaintiff will owe on the award.

The Facts

In the case before the court, Eshelman v. Agere Systems, Inc., Joan Eshelman had worked for Agere and its predecessor, Western Electric, for almost 20 years when she was diagnosed with breast cancer. As a result of chemotherapy treatment, Eshelman experienced short-term memory loss, which made her hesitant to drive. As her employer admitted, however, she continued to excel at her job and received excellent performance reviews and a promotion. Nevertheless, Eshelman subsequently was laid off as part of a company-wide reduction-in-force. She then sued Agere, alleging, among other things, that she was unlawfully terminated in violation of the Americans with Disability Act (ADA).

To prevail under the ADA, Eshelman had to convince the jury that she was a “qualified individual with a disability.” A “disability” under the ADA is (i) “a physical or mental impairment that substantially limits one or more of the major life activities of such [an] individual;” (ii) “a record of such an impairment;” or (iii) “being regarded as having such an impairment.” 

At trial, Eshelman did not contend that she was actually disabled within the meaning of the ADA at the time she was discharged; rather, she argued that her termination was based on Agere’s belief that she was disabled, or, alternatively, on her record of impairment. Notably, company representatives testified that they had considered transferring Eshelman to another location instead of laying her off, but decided against it based on their perception both that she would be unable to travel and unable to do perform the available job.

The jury returned a verdict for Eshelman on her ADA claim, although it did not specify the theory upon which it found Agere liable – i.e., whether it accepted Eshelman’s “regarded as” disabled claim or her “record of” disability claim, or both. The jury awarded Eshelman $200,000 – $170,000 in back pay and $30,000 in compensatory damages. Following the verdict, Eshelman asked the trial judge for an additional monetary award to offset the negative tax consequences of receiving the back pay award in a single lump sum. The trial court agreed to augment the jury award. Agere then appealed to the U.S. Court of Appeals for the Third Circuit, challenging the jury’s verdict, as well as the augmented back pay award.

The Ruling on Eshelman’s ADA Claim

In upholding the jury’s verdict, the Third Circuit first considered the circumstances under which an employer is deemed to have “regarded” an employee as being disabled. As the court explained, a person is “regarded as” having a disability covered by the ADA if she:

  • Has a physical or mental impairment that does not substantially limit major life activities but is treated by her employer as constituting such limitation;
  • Has a physical or mental impairment that substantially limits major life activities only as a result of the attitudes of others toward such impairment; or
  • Has no such impairment but is treated by her employer as having a substantially limiting impairment.

In other words, Eselman was required to prove either: (i) that despite having no impairment at all, Agere mistakenly believed that she had an impairment that substantially limited one or more of her major life activities; or (ii) that she had “a non-limiting impairment that Agere incorrectly believed substantially limited one or more of her major life activities.” A “major life activity” includes a broad range of activities (which, recently,were further expanded under the new amendments to the ADA, discussed below), including working and thinking. With respect to working, Eshelman had to demonstrate that Agere regarded her as unable to work in a particular class or broad range of jobs. As to “thinking,” Eshelman had to show that her inability to think arose from a physical or mental impairment that substantially compromised her ability to work, or caused her employer to believe that her ability to work was so compromised.

Agere argued that it did not base its decision to lay off Eshelman on her thinking or working abilities, but rather, only on her difficulty with driving, and driving is not considered a major life activity. The court, however, held that the jury’s rejection of this defense was reasonable, particularly considering the testimony of company representatives that their decision was based, at least in part, on their perception that she may not be able to perform the job at Agere’s other location. Quoting the trial court, the appellate court concluded that: “The jury’s function was to determine whether Agere’s non-discriminatory justification for Eshelman’s lay-off was the actual reason; it determined it was not.”

The appeals court also was not persuaded by Agere’s argument that Eshelman had failed to prove her “record of” disability claim. This claim required her to demonstrate that she had a “history of, or [had] been misclassified as having, an impairment that substantially limited a major life activity,” and that the company relied upon her record of impairment in making its employment decision. Here, the court found that Eshelman’s six-month absence from work, combined with her documented, ongoing memory problems after she returned to work, were sufficient to satisfy the “record of impairment” requirement.

The Ruling on the Grossed Up Award

Having affirmed the jury’s verdict, the Third Circuit then addressed the issue of the augmented award granted to Eshelman to compensate for her tax liability. Eshelman contended that the additional award was warranted because back pay awards are taxable and the lump sum payment would place her in a higher tax bracket. Thus, she argued, absent the "grossed up" award, she would owe more taxes than what she would have owed had she received this pay in the normal course of employment (i.e., in the absence of discrimination). The Third Circuit was sympathetic to Eshelman’s argument. Stressing that a chief remedial purpose of employment discrimination statutes such as the ADA is “to make persons whole for injuries suffered on account of unlawful employment discrimination,” and that trial courts have broad authority to fashion an equitable remedy, the court concluded:

Without this type of equitable relief in appropriate cases, it would not be possible “to restore the employee to the economic status quo that would exist but for the employer’s conduct. The court found further support for its holding by comparing the augmented award to an award of prejudgment interest on back pay awards. The court reasoned that an award to compensate for an increased tax burden, “as with prejudgment interest, represents a recognition that the harm to a prevailing employee’s pecuniary interest may be broader in scope than just a loss of back pay.” In so ruling, however, the Third Circuit made clear that it was not holding that a prevailing plaintiff in a discrimination case is “presumptively entitled to an additional award to offset tax consequences above the amount to which she would otherwise be entitled.” Rather, each case must be evaluated on its own merits and a trial court should use its wide discretion to “locate a just result.”

Bottom Line

With the passage of the expansive Americans with Disabilities Act Amendment Act (ADAAA), which became effective January 1, 2009, employers generally can expect courts to interpret the Act even more broadly so as to cover more plaintiffs. Among other things, the ADAAA:

  • Expressly requires that the ADA be “construed in favor of broad coverage of individuals," and explicitly expands the definition of a “major life activity” to include, among many other activities, thinking, concentrating, the operation of "major bodily functions," and conditions in remission or that are episodic.
  • Eliminates an employer’s ability to consider mitigating measures, such as medication, except for ordinary eyeglasses or contact lenses.
  • Requires individuals bringing "regarded as" disabled claims only to show that they were subjected to an action prohibited by the ADA because of an actual or perceived impairment, regardless of whether the impairment was perceived to "substantially limit" them in a major life activity (an even lighter burden of proof than Eshelman had here). On the other hand, the ADAAA excludes from coverage under the "regarded as" prong individuals with "transitory and minor" impairments (i.e., lasting less than six months).

In short, the ADAAA broadens the definition of disability and creates more situations in which an employer will have to engage in an interactive process to determine if (1) the employee in fact has a covered disability, and (2) whether a reasonable accommodation is available. Accordingly, employers who have not yet reviewed their policies on disability and reasonable accommodation should do so immediately.

Notably, as to the “gross up” aspect of the court’s ruling, the federal appellate courts are split on this issue. While the Third Circuit’s holding is consistent with that of the U.S. Court of Appeals for the Tenth Circuit, the District of Columbia Circuit has flatly rejected the argument that a court may augment a back pay award to compensate an employee for additional tax liability. Thus, the issue of "grossing up" may be ripe for review by the Supreme Court.

Employers should also keep in mind that if the Supreme Court is asked, but declines, to take up the issue, or rule against such gross ups, the Democratically-controlled Congress could step into the fray and pass legislation that, presumably, would favor plaintiffs.