Risk Management

Capping Liability

Supreme Double Play
Joan UrdangAugust 1, 2001

Corporations struck out in two recent U.S. Supreme Court decisions involving wage awards, and both cases underscored financial liability issues. In United States v. Cleveland Indians Baseball Co., the team doled out back pay in 1994 as the result of a free-agency settlement. It paid taxes at the 1994 rate, then asked for a refund from the IRS, claiming that it should have been taxed at the 1986 and 1987 rates, when the wages were due. A district court awarded the team a $97,202 refund. However, the Supreme Court overturned the ruling in April, deferring to the IRS’s “reasonable” interpretation of its own rules.

CFOs should also be cognizant of the FICA tax ramifications of back- pay settlements, says Stephen Kinnaird of Sidley Austin Brown & Wood. Kinnaird points to settlement structures that stretch payments over several years, which may occur with large awards of $500,000 or more. Because there is a wage cap on FICA taxes for the first $80,421 (after reaching the annual threshold, salaries are FICA-tax-free), corporations would wind up paying more in Social Security taxes over multiple years than in a one-time payment.

In the second case, Pollard v. E.I. du Pont de Nemours & Co., the high court overturned the U.S. Court of Appeals for the Sixth Circuit and declared that “front pay” tied to discrimination suits is not subject to compensatory damage limits. The Sixth Circuit, which reviews appeals from Kentucky, Michigan, Ohio, and Tennessee, is one of the last federal circuits to place front-pay restitution under the $300,000 cap for damages under Title VII of the Civil Rights Act, notes Mike Marshall, vice chair of the employment law practice at Stokes Bartholomew Evans & Petree in Memphis. Front pay is often awarded in wrongful dismissal suits to compensate for wages lost from the time of the judgment until reinstatement, or instead of reinstatement.

“Once a corporation is found guilty of violating the Civil Rights Act, there isn’t much it can do to mitigate the financial effects,” says Marshall. — Joan Urdang