We are about to enter into a national debate about the relevance of President Donald Trump’s past tax returns. These are sought in large part to determine the extent to which the President may have been financially entangled, in the past and through the current time, with foreign interests which could compromise his ability to lead our country objectively. These financial ties, if established through these returns, may have been used to coerce collusion with Russia in its’ proven past, and likely future, efforts to undermine our electoral process.
While these returns therefore have unquestionable relevance to current investigations, the issue is very different when complete tax returns are sought by defendants in employment litigation. This blog describes the very limited basis for seeking evidence of earnings post-termination in an employment dispute, and explains why complete tax returns are rarely appropriately requested, much less produced, in this kind of litigation.
The Obligation to Mitigate Damages
Defendants generally predicate requests for production of tax returns on a plaintiff’s obligation to “mitigate” damages following an allegedly illegal termination. In addition to this duty, any earnings post-termination can often serve to reduce, dollar-for-dollar, the economic loss a plaintiff has suffered and can recover in this litigation.
The economic loss a successful plaintiff can recover in an employment claim generally includes projecting through trial (called “back pay” loss), and beyond (called “front pay” loss, which can generally extend for 2-6 year beyond trial) the amount he or she could have expected to earn (salary/hourly pay plus bonus plus the value of all benefits) from the employer if the illegal termination had not occurred. This can and should even include promotions into positions of greater responsibility, when the evidence supports this kind of projection. Expert forensic economist testimony is often very helpful in establishing the full value of this loss, and effectively reducing future loss to “present value.” The difference between this total amount over time and the actual amount received by plaintiff in other earnings (with the limited exception described below), represents the recoverable “economic loss” from an illegal termination.
The duty to mitigate damages generally applies in any “wrongful termination” case, whether premised on discrimination, harassment, retaliation, or other common law or contractual obligation(s). This duty is limited, however, to making good faith efforts to seek “comparable” employment, and to disclose, with limited exception, earnings through work since termination, whether paid to the plaintiff as an employee or independent contractor, by check or cash. If a plaintiff cannot establish in litigation that he or she has satisfied this obligation, this can actually serve as a basis for a court to to deny and back-pay or front-pay loss.
Tax Returns Contain Irrelevant Information
Complete tax returns, however, contain far more information that simply wages earned in any given year. The sometimes very detailed process of determining gross and taxable income, and final tax amount owing, includes many steps which reveal charitable contributions, number of dependents, earnings outside of the employment or work context, and a potential myriad of claimed itemized deductions which the former employer has no right to discover in litigation. Therefore, resist any attempt to produce complete tax returns, and instead tailor any production to solely w-2 income earned (and the accompanying tax forms which issues when this income is paid), 1099 income earned (and accompanying forms), or, in rare instances, cash payments made for services rendered.
Not all Post-Termination Earnings are Relevant
Even in this circumstance, there are many occasions where post-termination earning cannot serve to reduce plaintiff’s economic loss from an illegal termination. When this is the case, counsel should resist any effort to produce evidence of these earnings in litigation. For instance, when a plaintiff earns money from “moonlighting” in a less than full-time role, or from a part-time position he or she may have been able to serve in even if the challenged termination had not occurred, these earnings should have no impact on an appropriate calculation of back- or front-pay loss. Resist any efforts to “discover” these earnings in litigation.
Maximizing Economic Loss is Crucial in Employment Litigation
Experienced legal counsel understand how to maximize economic loss when prevailing on employment claims. They also know how to ensure a plaintiff fully documents mitigation efforts to ensure that the record on this obligation is beyond reproach in litigation. Schaefer Halleen lawyers have this experience, and are well versed in every aspect of maximizing the recovery of economic loss, including retaining and working forensic economics experts when necessary.
We are available for a free consultation to assist you in determining whether you have been a claim where economic loss can be recovered, and will develop an effective strategy for maximizing this recovery.