City May Deduct Post-Termination Earnings From Award In Wrongful Termination Case

Category: Briefing Room
Date: Oct 6, 2020 05:55 PM

In 2017, the California Court of Appeal concluded that the City and County of San Francisco wrongly terminated Paulo Morgado from his job as a police officer.  As a remedy, the court directed the City to vacate Morgado’s termination and reinstate him pending an administrative appeal. The City did reinstate Morgado.  But, the City then suspended him without pay retroactive to his 2011 termination.  Morgado argued that the retroactive suspension was inconsistent with the court order.  The court agreed and issued an order holding the City in contempt.  The contempt order required the City to “unconditionally” vacate Morgado’s termination and suspension, and compensate him with front pay and benefits he would have earned between his termination and court victory.

Next, Morgado argued that the City was only partially complying with the court’s order.  Instead of paying him in full, the City offset the payment owed to Morgado based on his post-termination earnings as a mortgage broker.  Morgado argued that the City used his tax returns for the years he was employed as a broker and suspended as a police officer to deduct $181,402.  Morgado obtained a second order of contempt against the City directing it to repay the amount deducted.  That ruling made its way to the California Court of Appeal.

On appeal, the sole issue was whether the “front pay”- or the future wages Morgado lost for the time between his termination and his court victory-- was subject to a $181,402 deduction for the side income he earned during that time.  In public and private employment cases, the governing remedial principle is that the remedy should return the employee to the financial position he would have been in had the employer’s unlawful conduct not occurred.  Employees, however, are generally not entitled to recover in excess of make-whole damages.

The court first considered whether an employer can offset front pay.  Morgado argued that front pay is immune to offset. The Court of Appeal disagreed.  The court noted that there was no basis “in logic or fairness” to exclude front pay from the principle of “make-whole relief.” The court reasoned that the purpose is to make a wrongfully terminated employee whole. Thus, front pay must be subject to deduction to avoid overcompensation.

The court then evaluated whether the City could take a deduction for income generated by “moonlighting” or side employment.  The court noted that if an employee would have earned such income regardless of his employment status, the income cannot be deducted from the wrongful termination compensation.  Here, the court reasoned that if Morgado had not been terminated and suspended, he would not have been able to take up secondary employment as a mortgage broker and he would not have earned the disputed income.  Thus, the City was justified in deducting the compensation from his front pay award.

Finally, the court analyzed whether the City calculated the $181,402 deduction properly.  The court noted that the $181,402 was based on the total pre-tax income Morgado made as a broker.  The court concluded that taking away $181,402 from Morgado, when he earned only a portion of that figure after taxes, would deprive him of money that he was properly owed.  The court remanded the issue for the parties to determine the proper post-tax amount of the deduction.

Morgado v. City & Cty. of San Francisco, 53 Cal. App. 5th 1216 (2020).

Note:

This case demonstrates the complexities of offsetting damages awards in employment cases.  Agencies should ensure they are considering mitigating income when paying employees both back pay and front pay.

 

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