On August 31, 2012, the US Court of Appeals for the Second Circuit issued an opinion in Noel v. New York State Office of Mental Health, ruling that back and front pay qualify as taxable wages in the context of Title VII judgments, and that employers must withhold income and Federal Insurance Contributions Act (FICA) taxes when paying a judgment for back and front pay to a plaintiff.

Ian Noel, a former employee with the State Office of Mental Health Central New York Psychiatric Center (State), prevailed in his Title VII claim and won a jury award of $280,000 in back and front pay, plus other damages. Without notice to counsel or the district court, the New York State Office of the Comptroller (OSC) mailed Noel a check for just under half that amount, noting deductions for federal and state tax withholding, among other things.

Noel objected to the deductions, and moved for the OSC to pay the full judgment plus sanctions. The State disagreed, arguing that the back and front pay are "wages" under the Internal Revenue Code (IRC), and that the OSC was obligated by the IRC and state law to make the deductions. The district court sided with Noel, and ordered the OSC to pay the remaining amount of the judgment, plus interest and fees, to Noel.

On appeal, the Second Circuit reversed the judgment of the district court, concluding that back and front pay are wages under the IRC. Accordingly, employers are required to withhold New York and federal income taxes and FICA taxes on judgments for back and front pay awarded to employees under Title VII.

The Second Circuit also ruled that the district court abused its discretion in awarding Noel the full amount of the judgment in spite of the employer's decision to withhold taxes, holding that this constituted an inappropriate expense for the public and an undeserved windfall for Noel. Although a district court has the authority to oversee the procedure under which deductions are taken, the court noted, it held that the court should not have awarded the double payment to Noel.

With its decision, the Second Circuit joins the First, Fourth, Sixth, Ninth and Tenth Circuits in concluding that awards of front and back pay are wages subject to statutory withholding. The Fifth Circuit has found that back pay, but not front pay, is subject to wage withholding.