Employment Roundtable: Updates In Discrimination Law

Wednesday, November 1, 2006 - 01:00
Daniel A. Feinstein

In this roundtable, we discuss two recent New York decisions that expanded the scope of the state's discrimination law. The first decision involves the application of New York State's discrimination law to employees who are working outside the United States, but who report to supervisors based in New York.This matter has broad implications for multi-national corporations with offices in New York. In the second decision, a state court held that a transgendered individual is protected under New York State's discrimination law on the grounds that it constitutes discrimination based on sex. Our third topic relates to the taxation of non-physical damage awards in employment discrimination cases. In a decision that is likely to have a significant impact on negotiations to settle discrimination claims brought by employees against their employers, the U.S. Court of Appeals for the District of Columbia Circuit held that the taxation of damage awards for non-physical injuries is unconstitutional.

Out-of-State Employees May Sue For Employment Discrimination

The Southern District of New York recently extended the New York State Human Rights law to apply to employees outside of New York. Hart v. Dresdner Kleinwort Wasserstein Securities LLC., 2006 U.S. Dist. LEXIS 56710 (S.D.N.Y. 2006).In Hart , plaintiff employees worked in the London office of investment bank Dresdner Kleinwort Wasserstein Securities. However, the plaintiffsreported both to a supervisor in London and a supervisor in New York. Accordingly, decisions regarding the employees' salary, bonuses, and promotions were partially made in New York. Id . at 21-22. In light of these facts, Judge Batts ruled that New York State and City Human Rights Laws applied extra-territorially to the London employees. In doing so, the court specifically relies on the statute's provision which invokes protection from discriminatory acts against a state resident committed outside the state, in addition to acts committed within the state.

The New York State and City Human Rights Law offers plaintiffs many benefits over suing under federal discrimination statutes, including a longer statute of limitations and greater monetary damages. Because of these considerations, employers must be wary of their out of state employees having an opportunity to obtain the protections of New York law, particularly when employment decisions affecting these employees are not made locally. This decision will likely have significant implications for companies that have out-of-state employees report to New York managers, or out-of-state employees report to one manager in the local office and another manager in New York, because these employees may be protected under New York State and City Human Rights Laws. Both of these laws look to where the discriminatory acts take place, rather than the place of employment. Id . at 23.

State Discrimination Law Extends To Transgendered Individuals

In another recent decision, the New York Supreme Court addressed the issue of whether the New York Human Rights Law's protection from workplace discrimination applied to transgendered individuals.In Buffong v. Castle on the Hudson , 2005 N.Y. Misc. LEXIS 3194 (Sup. Ct. 2005), Eric Buffong, a transsexual individual who was born as a female named Erica, suffered months of harassment by his co-workers, a reduction in his working hours, and an eventual discriminatory discharge from his job, all as a result of his employer's discovery that he used to be a woman.

Buffong filed suit against his employer for $3 million dollars in damages, claiming that it violated the New York State Human Rights Law. The employer made a motion to dismiss for failure to state a claim, alleging that the New York State Human Rights Law, unlike the New York City Human Rights Law, did not extend protection to transgendered individuals. However, Judge Lefkowitz denied the employer's motion to dismiss the complaint, citing past rulings which suggested that New York State Human Rights Law did indeed protect transgendered individuals.

The Buffong Court cited the much publicized decision in Richards v. United States Tennis Association , 93 Misc.2d 713, 714 (Sup. Ct. 1977), in which Plaintiff underwent a sex change to 'become a female, psychologically, socially, and physicallyafter many years of being a transsexual, a woman trapped inside the body of a man.'Before the surgery, Plaintiff was a nationally ranked male tennis player. After undergoing a sex change, plaintiff began to enter women's tournaments, and progressed to the finals for women's singles at the Mutual Benefit Life Open.Subsequently, the United States Tennis Association (USTA) began to prevent Richards from participating in the women's division without a sex determination test. Richards, however, claimed that the sex determination test that was sought to be used was 'recognized to be insufficient, grossly unfair, inaccurate, faulty and inequitable by the medical community in the United States for purposes of excluding individuals from sports events on the basis of gender.' The court agreed, finding the USTA in violation of Richard's rights under the Human Rights Law. The court granted Richards a preliminary injunction, allowing her the right to compete as a woman.

Almost twenty years later, the New York Supreme Court extended the Richards ruling to hold that derogatory comments regarding the fact that an employee changed his or her sexual status is sex discrimination 'just as would comments based on the secondary sexual characteristics of a person.' Maffei v. Kolaeton Industry, Inc. , 164 Misc. 2d 547, 555-556 (Sup. Ct. 1995). The court reasoned that a transsexual male may be considered a subgroup of men, and such discrimination against a subgroup should not be permitted under the law.

The Taxable Income Exclusion For Non-Physical Damages Is Re-Imposed

Our third highlight involves a significant ruling on the taxation of damages. The U.S. Court of Appeals for the District of Columbia Circuit recently held that Section 104(a)(2) of the Internal Revenue Code (the 'IRC') is unconstitutional insofar as it permits taxation of compensation for non-physical personal injuries, which compensation is unrelated to lost wages or earnings. Murphy v. IRS , No. 05-5139, 2006 U.S. App. LEXIS 21401, at *32 (D.C. Cir. Aug. 22, 2006).

The plaintiff in Murphy filed a complaint with the U.S. Department of Labor ('DOL') alleging that her former employer violated various whistleblower statutes and provided unfavorable references to potential employers. The DOL agreed with Murphy , determining that Murphy's former employer had engaged in unlawful discrimination and retaliation. The DOL remanded the case to an Administrative Law Judge ('ALJ') to determine the amount of compensatory damages. The ALJ recommended and the DOL Review Board affirmed an award to Murphy of $45,000 in damages for emotional distress and $25,000 for injury to her professional reputation caused by the unfavorable references.

The former employee included the $70,000 award as income on her annual tax return, but subsequently filed an amended tax return seeking a refund of the taxes attributable to the damages award based on 104(a)(2) of the IRC.Section 104(a)(2) provides, in pertinent part, that, 'gross income does not includedamagesreceivedon account of personal physical injuries or physical sickness.' (emphasis added). The IRS denied the former employees refund because she had failed to demonstrate that the damages were attributable to a physical injury or physical sickness.

The former employee subsequently filed a suit against the IRS arguing that her damages were for physical injuries, and thus excludable under Section104(a)(2), and in the alternative that Section 104(a)(2) is unconstitutional because it permits taxation of damages that are not 'incomes' as defined by the Sixteenth Amendment to the U.S. Constitution. The district court denied the former employee's claims.

On appeal, the Circuit Court first held that the former employee's damages award was not excludable from taxation pursuant to 104(a)(2). Specifically, Judge Ginsberg, writing for the Court, noted that 104(a) was amended in 1996 to provide that only damages for physical injuries are excluded, and that ' emotional distress shall not be treated as a physical injury or physical sickness .' The former employee argued that the ALJ's award was for physical injuries, such as anxiety attacks, shortness of breath, dizziness, and damage to her teeth from grinding. However, the Court of Appeals disagreed, holding that the ALJ's award was not 'on account of' or 'because of' any physical injuries. The Court instead held the award was 'on account of' the former employee's mental anguish, and that the physical conditions she suffered were merely manifestations of the mental anguish.

The Court of Appeals, however, agreed with the former employee's alternative argument that 104(a)(2) violated the Sixteenth Amendment to the extent that it included as taxable income damage awards for non-physical injuries, which are unrelated to lost wages or earnings. Relying on the Supreme Court's analysis in O'Gilvie v. U.S. , 519 U.S. 79 (1996), the Circuit Court determined that a damages award for non-physical injuries was not 'incomes' under the Sixteenth Amendment because it was not in lieu of something normally taxed as income, such as wages or earnings, and thus was not subject to taxation.

The Court of Appeals also determined that an award for non-physical damages, which was unrelated to lost wages or earnings, was not something that the drafters of the Sixteenth Amendment would have considered taxable income.Specifically, the Court noted that in 1913 - when the Sixteenth Amendment was ratified - both physical and non-physical damages were treated the same, as they were both actionable in tort. Additionally, the Court concluded the term 'incomes' did not include damages for non-physical injuries. Consequently, the Court held that damage awards for such injuries are not taxable under the Sixteenth Amendment.

The impact of this decision is to re-impose the taxable income exclusion for non-physical damages that existed prior to the 1996 IRC amendment. Thus, the decision can be utilized in settlement negotiations as justification for proposing lower settlement amounts to the extent there is a claim being settled which involves a claim for damages resulting from reputational damages due to whistleblowing or another type of claim for non-physical injury unrelated to a claim of lost earnings. However, employers should be cautioned that this is not an Internal Revenue Service ruling and that it is possible that the decision by the D.C. Circuit Court could be challenged by the IRS. Therefore, the IRS would not provide any amnesty to a company that withheld taxes from a settlement for non-physical injuries if the IRS were to successfully challenge this decision.


These three decisions, though covering diverse subject, remind practitioners of the increased attention to disputes arising in the workplace. Now more than ever, forward thinking employment law practices require proactive considerations of both the actual and likely expansion of existing employment laws.

Michael C. Lasky and Daniel A. Feinstein are Partners in the New York-based firm of Davis & Gilbert LLP, where they concentrate their practice in employment counseling and litigation. The authors are grateful to an employment law associate, Sara Barker, for her assistance in the preparation of this article.

Please email the authors at mlasky@dglaw.com or dfeinstein@dglaw.com with questions about this article.