On January 29, 2015, in EEOC v. Northern Star Hospitality, Inc., the US Court of Appeals for the Seventh Circuit upheld an award of equitable damages intended to make a successful Title VII plaintiff whole for the increased income taxes he would be required to pay on awarded backpay damages. Echoing the Third and Tenth Circuits, the Seventh Circuit found that the district court did not abuse its discretion in approving a "tax component award." The fact that the district court did not specifically outline how it reached the amount of the tax component award did not prevent the Seventh Circuit from approving the award. Separately, the Court upheld the district court’s decision to hold two corporate successors liable for their predecessor's Title VII violations. (No. 14-1660, (7th Cir. Jan. 29, 2015).)

The EEOC brought a Title VII harassment and retaliation action on behalf of Dion Miller, an African-American restaurant worker who was terminated after complaining about racial harassment. The complaint was initially brought against one corporation that ultimately was dissolved and was later amended to include two successor corporations (all three companies had the same owner).

The district court granted summary judgment to the defendant on Miller's racial harassment claim but denied summary judgment on his retaliation claim. An initial bench trial found that the two successor corporations were subject to liability for the actions of the dissolved predecessor entity. A jury later awarded compensatory damages to to Miller on the retaliation claim.

The EEOC then sought additional remedies for Miller, including backpay, front pay and a tax component award to offset Miller's tax liability on any award of these damages. The district court awarded backpay damages to Miller but no front pay. The district court also granted the EEOC's request for a tax-component award, awarding Miller $6,495.00, representing 15% of his backpay award of $43,300.50. The district court indicated that the 15% tax component award was based on estimating Miller's taxes on the backpay award, but did not outline how it arrived at the 15% figure.

The defendants appealed, challenging the district court's tax component award as an abuse of discretion. The defendants also challenged the district court’s successor liability finding.

The Seventh Circuit:

The Seventh Circuit expressed disappointment that the district court had not more clearly outlined how it had arrived at the 15% amount, but did not find that it abused its discretion. That shortcoming was not significant enough to warrant reversal given the broader goal of ensuring that a successful Title VII plaintiff is made whole.

The Seventh Circuit also affirmed the district court's conclusion that the two successor corporations would be liable for the damages arising from the retaliatory actions of their predecessor. The district court reached the appropriate results even thought it had failed to expressly apply the Seventh Circuit’s successor liability factors under Teed v. Thomas & Betts Power Solutions, LLC (711 F.3d 763, 769 (7th Cir. 2013); and see Legal Update, Successor Liability Applies in FLSA Actions, Even if Asset Purchaser Disclaims the Acquired Company's Liabilities: Seventh Circuit).

EEOC v. Northern Star Hospitality, Inc. continues the trend among circuit courts of endorsing equitable tax component awards to supplement backpay awards in Title VII cases. The court's analysis does not suggest that it would not approve tax component awards to supplement front pay awards, but the court had no occasion to address that issue.