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When calculating a backpay award for workers who receive cash tips, a judge is not required to limit the award to the amount reflected in the workers’ tax returns, but instead may base a more generous award on the workers’ testimony that they earned much more — and their admission that they cheated on their taxes. In Atlantic Limousine Inc. v. National Labor Relations Board, a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals upheld backpay awards totaling nearly $40,000 to Victor Jenkins and Henry Purcell that resulted from the NLRB’s finding that the pair were among five Atlantic employees who were illegally fired or suspended for their union activity. Although both men had reported to the Internal Revenue Service that they earned about $125 per week in cash tips, they testified before the NLRB that they actually earned as much as $480 per week. The administrative law judge who heard the case decided that Jenkins should get $360 per week and that Purcell should get $325. The NLRB also said it would be notifying the IRS of the decision. On appeal, Atlantic’s lawyers argued that the ALJ should have based his findings on the workers’ tax returns and the company’s records. But the appeals panel found that the tax return evidence “could be said to cut both ways.” Writing for the court, U.S. Circuit Judge Marjorie O. Rendell wrote: “Even though the tax returns contradict the [workers'] claims, the fact that their sworn testimony that they underreported their income exposed them to tax evasion and perjury charges actually bolsters their credibility.” Rendell found that Atlantic failed to meet the heavy burden of showing that the NLRB’s factual findings were wrong. “The Board’s findings of fact in a backpay proceeding will be upheld unless the record, considered as a whole, shows no substantial evidence to support those findings,” Rendell wrote. “We will not disturb a backpay order unless it can be shown that the order is a patent attempt to achieve ends other than those which can be fairly said to effectuate the policies of the Act.” Atlantic, she said, “presented no basis for concluding that the employees’ tax returns, rather than their testimony, reflected the actual amount of their income.” Rendell, who was joined by Chief U.S. Circuit Judge Edward R. Becker and visiting 8th Circuit Senior Judge Frank J. Magill, found that the NLRB’s decision also made sense because it “recognizes the existence and equal importance of both policies — enforcing our nation’s tax laws and making the [workers who suffered discrimination] whole.” If the NLRB had chosen to award only the amount stated on the tax returns, Rendell found that “it would have ignored the remedial underpinnings of the law, and rewarded Atlantic, the offending party.” Rendell also found that the government benefits from such an approach since the workers will pay taxes on the judge’s award. “While federal tax policy discourages underreporting of income, and favors punishing those who do, federal tax policy would appear to have no interest in limiting a backpay award. In fact, it could be said that it has the opposite interest because once Jenkins and Purcell receive an award (that is not limited by reference to reported income), they will have to pay tax on what they receive, paying the federal government more than if the award had been limited to their reported income,” Rendell wrote. “The IRS will have the information necessary to prosecute the [workers] if it so chooses, and will reap tax revenue. And Atlantic will have to ‘make whole’ two employees against whom it wrongly discriminated, fulfilling the purpose of the Act,” she wrote. Atlantic’s lawyers, Angelo J. Genova and Brian O. Lipman of Genova Burns & Veronoia, argued that if the court rejected its proposed rule that judges should disregard evidence that differs from an employee’s tax returns, it would be guaranteeing that all workers seeking backpay will lie about their earnings. Rendell disagreed, saying, “Atlantic ignores the fact that this deception will probably be quite costly in other ways. By testifying that they had underreported their income to the IRS, Purcell and Jenkins subjected themselves to prosecution for tax evasion. Therefore, any incentive that they might have to lie to inflate their income is countered by the fear, and very real possibility, of criminal charges.”

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