While not a total fix, there is a least a little reprieve for those resolving complaints before the National Labor Relations Board (NLRB). In their December 18, 2012 Latino Express supplemental decision (the initial decision was July 31, 2012, but the Board invited briefing on the issues of taxation and reporting of the backpay award to social security), the Board ruled that the respondent employer should reimburse the complainant (ex) employee of any excess taxes paid on the settlement. It further ruled that the respondent must report to social security the backpay paid so that the amount can be properly credited to the employee's social security calculation for the appropriate year(s).
In reality, the huge tax hit on settlements is not too big of a deal, at least not for employees that tend to get tax refund checks. Even though they pay excess taxes, they tend to get most if not all of it back when it is tax refund time. But perception typically trumps reality, and when the perception is that the employer is once again sticking it to the poor (ex) employee, it creates additional hard feelings, animosity and hurts otherwise good-faith settlement negotiations between the parties. So kudos to the NLRB for taking a step in the right direction. Now hopefully the courts and/or legislature will follow suit.