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It's Settled

A new law makes it easier to reach settlements.
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This story appears in the February 2005 issue of Entrepreneur. Subscribe »
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It isn't often that plaintiffs' lawyers and business advocates work together to ensure the passage of a law, but that's what happened in the months leading up to October 22, when President Bush signed the American Jobs Creation Act of 2004. Section 703, the Civil Rights Tax Relief Act, overturns a tax rule that has divided circuit courts and bedeviled both sides in employment discrimination cases.

Until now, when an employee has won or settled a lawsuit over wrongful termination or workplace discrimination, the award has been taxable--including the contingent fees paid to the attorneys. The money awarded was supposed to make up for lost wages, but between attorney's fees and the taxes on them, plaintiffs typically took home less than 30 cents on the dollar. Knowing this, plaintiffs and their lawyers would push for higher settlements.

That's why groups as diverse as the National Employment Lawyers Association and the U.S. Chamber of Commerce pushed for the new law. Successful plaintiffs will be able to deduct attorney's fees--typically a third of the award--from their taxable income. But employers will also benefit because plaintiffs no longer have to make up for the tax liability by demanding settlements that are higher than actual lost wages. So if an employee alleges discrimination, it should now be easier to reach a reasonable settlement.


Jane Easter Bahls is a writer in Rock Island, Illinois, specializing in business and legal topics.

Edition: May 2017

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