MSPB Allows Pecuniary Compensatory Damages for Adverse Tax Consequences of Back Pay Awards
On April 2, 2026, the Merit Systems Protection Board (MSPB) issued a precedential decision to find pecuniary compensatory damages can be awarded when an appellant has demonstrated that they suffered adverse tax consequences because of a back pay award made to remedy a discriminatory personnel action.
In Murray v. NASA, the MSPB found the appellant proved her failure to accommodate disability discrimination claim and reversed appellant’s removal action, restoring her to duty. This restoration, effective May 10, 2016, entitled the appellant to benefits, back pay, and interest on back pay. The appellant subsequently filed a motion for compensatory damages and a motion for tax offset payment due to an adverse tax consequence. This adverse tax consequence arose because the appellant received several years of back pay in one lump sum, whereas if the action had not been taken, she would have had a lower tax burden with her pay spread out over multiple years.
The administrative judge denied appellant’s motion for a tax offset payment but determined the appellant was entitled to nonpecuniary damages of $22,000 for other reasons. The appellant then filed a petition for review.
The Civil Rights Act of 1991 (42 U.S.C. § 1981a(a)(2)-(3)) states that an employee may recover compensatory damages if a federal agency engaged in intentional and unlawful discrimination on the basis of her disability. And, the MSPB can order a compensatory damages payment when there is a finding of such discrimination and harm resulting from it. According to the Board, “an appellant must demonstrate that she has been harmed as a result of the agency’s discriminatory action and must establish the extent, nature, and severity of the harm, as well as the duration or expected duration of the harm.”. If this can be shown, pecuniary damages are available for costs related to the discriminatory conduct.
Here, the appellant argued that the EEOC has previously recognized that an agency is liable for increased tax liability due to a lump sum payment of back pay in a single tax year. In response, the Agency explained that the EEOC awards tax offset payments as an equitable remedy, not an award of compensatory damages. The Board acknowledged that it had previously and consistently held it lacks the authority to address the tax consequences stemming from a back pay award. But the Board noted that there were no prior precedential decisions from the Board, or the U.S. Court of Appeals for the Federal Circuit “in which the Board’s authority to award an appellant compensation for the adverse tax consequences of a lump sum back pay award has been discussed in the context of a finding of unlawful discrimination and consideration of compensatory damages following the enactment of the Civil Rights Act of 1991.”
Addressing the issue now, the Board ultimately agreed with precedent from the EEOC and held that when cases where an agency commits prohibited discrimination under Title VII or the Rehabilitation Act, the Board can award compensatory damages for demonstrated adverse tax consequences as a result of a lump sum back pay award. The opinion stated that “the EEOC has held that the purpose of compensatory damages is to compensate an employee for the proximate injury caused by the employment discrimination, and the compensation for the adverse tax consequences of receiving a lump sum back pay award meets this criterion,” citing Holler v. Dep’t of the Navy, EEOC Appeal Nos. 01990407 and 01982627, 2001 WL 991924 at *3 (Aug. 22, 2001).
The Board remanded the matter to the Administrative Judge for adjudication of the appellant’s pecuniary compensatory damages claim.
Read the Full Opinion: Murray v. NASA
