OFCCP seeks back pay as a part of a make-whole remedy resolving discrimination violations under Executive Order 11246, Section 503 and VEVRAA. Back pay serves to remedy lost earnings that the victims would have received absent discrimination. OFCCP’s Directive 2013-04, “Calculating Back Pay as a Part of Make-Whole Relief for Victims of Employment Discrimination,” provides additional guidance on calculating back-pay.
a. Back Pay Required. Back pay is normally part of any make-whole remedy. The U.S. Supreme Court stated in Albemarle Paper Co. v. Moody, 422 U.S. 405, 421 (1975) that, under Title VII, “given a finding of unlawful discrimination, back pay should be denied only for reasons which, if applied generally, would not frustrate the central statutory purposes of eradicating discrimination throughout the economy and making persons whole for injuries suffered through past discrimination.” Given this stringent standard, it would be rare for the victim not to receive back pay.
b. Elements of Back Pay. Back pay should reflect total compensation lost by the victim due to the discriminatory employment action, practice or procedure. Many elements of compensation, in addition to salary or wages, are normally part of a back-pay award (e.g., overtime and premium pay, incentive pay, raises, bonuses, sales commissions, cost-of-living increases, tips, medical and life insurance, fringe benefits, pensions, stock options and awards).
c. Benefits. For the benefits portion of the back pay, the CO should gather information about when the benefits became effective (e.g., what is the waiting period?) and the monetary value of the benefits. With sufficient information, benefits may sometimes be calculated as a monetary figure (e.g., employer paid premiums, plus employer contributions to a retirement account amount, to X per year) or as a percentage of wages or salary (e.g., 20 percent of the total compensation package). Where the employer’s cost is unknown, survey data related to the cost of benefits, such as the Employer Costs for Employee Compensation survey published by the BLS, should be used to generate an estimate of fringe benefits as a percent of wages.
d. Deductions and Offsets.
- Interim Earnings. If a victim earned money from employment elsewhere during the interim, this amount is deductible from total back pay. Not all financial compensation received by the victim during the back pay period, however, constitutes “interim earnings.” For example, if an employee had both earnings from a full-time job and a part-time job, and could have continued in the part-time job even absent the discrimination, the earnings from the part-time job are not deemed interim earnings and are not subtracted from back pay. Additionally, payments from social safety net systems such as unemployment and workers compensation programs are considered a “collateral source” and do not constitute interim earnings.
- Mitigation. Mitigation refers to the duty of the victim to use reasonable diligence in seeking alternative employment during the back pay period. Contractors may seek to reduce back pay awards by the amount the victims could have earned with reasonable diligence, less expenses reasonably incurred in looking for alternative employment (e.g., cost to prepare a resume, gas and parking fees incurred when going for an interview). Reasonable diligence does not mean that the person had to be successful in obtaining other employment, only that he or she must make a reasonable effort. The victim only needs to accept employment that is substantially equivalent to that sought or held with the contractor. The victim does not need to relocate to accept alternative employment.
- Burden of Proof. The contractor bears the burden of proving the amount of interim earnings and the failure of the victim to take reasonable steps to mitigate back pay loss.
e. Periods of Unavailability. Back pay awards do not include periods when the victim would not have been employed even without discrimination (e.g., during periods of unpaid leave or incarceration).
f. Interest on Back Pay.
1. Purpose and Rate of Interest. The purpose of applying interest on back pay awards is to compensate the victim(s) for the loss of the use and purchasing power of their income. Interest on back pay is calculated at the same percentage rate as the Internal Revenue Service’s (IRS) underpayment formula. Interest on back pay must be compounded quarterly under the laws OFCCP enforces.
2. Rate Adjustments. The IRS may adjust its rate on a quarterly basis. The interest rates applicable to various periods are available on the IRS website at https://apps.irs.gov/app/picklist/list/federalRates.html.
g. Withholding of Taxes. Contractors must withhold all applicable federal, state and local income taxes; Federal Insurance Contributions Act (FICA) (social security and Medicare); and Federal Unemployment Tax Act (FUTA) (unemployment insurance) taxes from employment discrimination settlement payments. The contractor’s payments of back pay, front pay and lump sum payments made in place of lost fringe benefits are “wages” subject to such tax withholding. Contractors are increasingly asking victims to complete a W-4 form as a condition of the settlement. This is not a settlement requirement and IRS guidance currently exists that states that an employer can assume a single deduction in the absence of a W-4 form.367 The contractor must supply the victim(s) with a Form W-2 showing the wage component of the settlement and the amount of taxes withheld. Note, however:
1. FICA. FICA requires an employer, as well as an employee, contribution. The employer should not pay its FICA obligation out of a settlement; the employer share must be paid on top of the negotiated back pay.
2. FUTA. In almost all states, FUTA (unemployment insurance) taxes are an expense paid only by the employer (i.e., there is no matching employee contribution). Therefore, the employer should not take an offset or deduction for FUTA when computing back pay awards unless the particular state where the affected party was or would have been employed required employers to withhold FUTA taxes from employees’ wages or salaries during the time period for which the employer is calculating a back pay award.
3. Interest. Interest included in a settlement, if separately stated, is not subject to either FICA or FUTA. While interest is taxable as income to the recipient, just as interest on a bank savings account would be taxable, it is not subject to withholding by the employer. The contractor, however, must supply the victims with the Form 1099 stating the interest component of the settlement.
4. Benefits. Since employer contributions to most fringe benefits, such as the employer paid portion of health insurance premiums or pension funds, are not taxable (whether retroactive or not), they are not subject to withholding.
5. Tax offsets. In individual cases, a tax offset may be needed to restore the economic position of the victim. If a back pay award causes an individual to be pushed into a higher tax bracket or the cash value of tax-deductible benefits is high, it may be appropriate to include in the remedy a tax offset to make the victim whole. DPO can assist with estimating an appropriate offset amount.
367. See 26 CFR 31.3402(f)(2)-1(a).