Commissioner v. Schleier: back to the drawing board on the taxation of employment dispute recoveries.

Abstract

The Court's decision in Schleier leaves the taxation of recoveries arising out of employment disputes, as well as many other types of disputes, in a state of confusion. To be sure, employers and employees now know with certainty that recoveries under the ADEA are not excludable from income under Section 104(a)(2). Recoveries under other statutes, however, including the Fair Labor Standards Act and the 1991 version of Title VII of the Civil Rights Act of 1964, are altogether unclear after Schleier. In the absence of further guidance, employers should consider adopting a more conservative approach to employment dispute settlements by treating settlement payments as taxable income, subject to withholding and employment taxes.