FOLLOW-UP: RETALIATORY DISCHARGE SETTLEMENT

Discussed in last post how important is is to fully understand your compensatory damages in retaliatory discharge cases before jumping into them. It's also important to understand taxable consequences of a settlement in these cases. First, if any portion of the settlement is to compensate the plaintiff for lost wages, that portion of the settlement is taxable income. The client should be advised before settlement talks get serious that he'll have to duke Uncle Sam the following April for the lost wage portion.

In addition, there is some caselaw that suggests that the employer can withhold FICA from the lost wages portion of the settlement[see James v. Mobile Medics, (4th Dist. 2003), 341 Ill.App.3d 451, 275 Ill.Dec. 230, 792 N.E.2d 461]. In the retaliatory case I just settled, defense counsel wants to do precisely that - withhold the appropriate amounts from the lost wages portion of the settlement. I am suggesting that they simply cut the check for that amount in full and send a 1099 to plaintiff next year. We are still butting heads on it.

Also, in the May, 2002 Illinois Bar Journal, Nile J. Williamson wrote an excellent piece about how to address some of the tax questions that come up when you have settlements that include both taxable and non-taxable amounts. Worth a look.