*1 THIS MATTER is before the Court on the parties' Joint Statement on a Limited Discovery Dispute Regarding Plaintiffs' Full Tax Returns (the “Joint Statement on Plaintiffs' Tax Returns,” ECF No. 34) and the parties' Joint Statement on a Limited Discovery Dispute Regarding Defendant's Full Tax Returns (the “Joint Statement on Defendant's Tax Returns,” ECF No. 35) (collectively, the “Motions”), filed on January 31, 2024, and February 13, 2024, respectively. The Motions outline discovery disputes surrounding the production of Defendant Emergency Coverage Corporation's (“Defendant”) and Plaintiffs Anuradha Naidu-McCown's and Uduak Akan-Etuk's (collectively, “Plaintiffs”) full tax returns. The Court will dispense with oral argument because the facts and legal contentions have been adequately presented to the Court, and oral argument would not aid in the decisional process. See E.D. VA. LOC. CIV. R. 7(J). For the reasons that follow, the Court finds that neither Plaintiffs nor Defendant are required to produce their full tax returns.

Plaintiffs bring a Class Action against Defendant alleging misclassification of workers under Virginia Code § 40.1-28.7:7 and violations of the Virginia Wage Payment Act (“VWPA”) under Virginia Code § 40.1-29. (Compl. ¶¶ 118–124, ECF No. 1.) The parties now request resolution of a discovery dispute regarding the production of (1) Plaintiffs' full personal and business tax returns and (2) Defendant's full tax returns.

Defendant served a request for production of Plaintiffs' personal tax returns and the tax returns of their business entities. (Joint Statement on Pls.' Tax Returns at 2.) Plaintiffs objected to the request. (Id.) The parties met and conferred on multiple occasions but were unable to resolve the discovery dispute. (Id.) However, in an attempt to resolve the dispute, Defendant agreed not to challenge the designation of Plaintiffs' tax returns as “Highly Confidential” under the Stipulated Protective Order (ECF No. 29). (Joint Statement on Pls.' Tax Returns at 2.) “Plaintiffs offered to produce ‘certain tax documents,’ including 1099s, W-2s, and K-1s, but maintained their objections to producing the full returns.” (Id.) Defendant maintained its request for the full tax returns. (Id.)

After the discovery dispute regarding Plaintiffs' tax returns arose, “Plaintiffs served conditional discovery seeking production of Defendant's full [t]ax [r]eturns in the event [Plaintiffs'] tax returns are deemed discoverable.” (Joint Statement on Def.'s Tax Returns at 2.) The parties met and conferred on this issue but were unable to resolve the discovery dispute. (Id. at 2-3.)

Defendant's asserts that Plaintiffs' and their business entities' tax returns “are relevant to class certification, the [p]arties' claims and defenses, and damages.” (Joint Statement on Pls.' Tax Returns at 2.) Specifically, because “Plaintiffs seek damages in the form of wages, salary, the value of benefits offered to employees, expenses incurred, and any other compensation they allegedly lost,” Defendant contends the tax returns are “necessary to challenge and verify relevant information, as well as to see the source of their income and the extent of their business undertakings.” (Id. at 2–3.)

*2 Additionally, Defendant provides the following reasons the tax returns are relevant: they (1) “will contain information pertaining to [ ] Plaintiffs' class allegations;” (2) “will contain representations about [ ] Plaintiffs' independent contractor status;” (3) “will show itemized business expense deductions;” (4) “will show if[ ] [P]laintiffs derived income from other sources;” (5) “will show investment, gains, and losses;” (6) “will show what taxes [P]laintiffs paid on compensation;” and (7) “are necessary for [Defendant's] rebuttal expert to prepare his expert report.” (Id. at 3–6.)

Plaintiffs assert that their full tax returns are irrelevant to this case because the Virginia Code does not permit them to recover taxes and they are not seeking expenses as part of their damages. (Id. at 6 (citing Va. Code § 40.1.28.7:7).) They also allege that the information Defendant is seeking “can be obtained through less invasive means without production of full tax returns.” (Id.) Plaintiffs allege that the W-2s, 1099s, and K-1s are alternative sources of the information Defendant seeks, and providing the full tax returns would be duplicative. (Id. at 7.) Plaintiffs take no issue with Defendant's discovery into “whether Plaintiffs earned any income working for non-TeamHealth hospitals.” (Id. at 7–8 (emphasis in original).)

Plaintiffs have also filed conditional requests for discovery of Defendant's tax returns in the event that the Court finds Plaintiffs' tax returns discoverable. (Joint Statement on Def.'s Tax Returns at 2.) Plaintiffs' argument mirrors Defendant's arguments, and they assert that, if Plaintiffs' tax returns are discoverable, then Defendant's tax returns are likewise discoverable. (See id. at 3–5.) However, Plaintiffs note that, if the Court finds that Plaintiffs' tax returns are not discoverable, then their request for Defendant's tax returns is withdrawn. (Id. at 5.)

Defendant opposes Plaintiffs' request and asserts that its tax returns are subject to qualified privilege. (Id.) Defendant also argues that the parties' tax returns differ because “there is no mystery as to how [Defendant] classified Plaintiffs in [its] tax returns: [Defendant] admits that it classified them as independent contractors.” (Id. at 6 (emphasis in original).) Thus, “[e]verything Plaintiffs seek in [Defendant]'s tax returns is already known or knowable without their disclosure.” (Id. at 7.) Defendant also disapproves of Plaintiffs' “tit-for-tat discovery of [Defendant]'s tax returns.” (Id.)

Tax returns are generally protected by qualified privilege. See Auto Distribs., Inc. v. Peugeot Motors of Am., Inc., 96 F.R.D. 147, 148–49 (E.D. Va. 1982). Qualified privilege “disfavors the disclosure of income tax returns as a matter of general federal policy.” Id. at 148 (internal citations omitted). When applying this qualified privilege, the Court applies a two-part test to assess whether the party seeking discovery can overcome the privilege: “(1) the requesting party must show that the tax returns contain specific information with relevance to the subject matter at issue; and (2) the Court then determines whether a compelling need exists for the information, because the requesting party cannot obtain it elsewhere.” In re Banco Mercantil De Norte, S.A., No. 3:23-mc-08, 2023 WL 6690708, at *13 (E.D. Va. Oct. 12, 2023) (internal citation omitted). “On the second step, the burden shifts to the party opposing discovery to identify an alternate means for obtaining the information.” Id. (internal citation omitted).

At step one, the Court must assess whether Plaintiffs' full tax returns are relevant to this case. Defendant argues that Plaintiffs' personal and business tax returns are relevant to answer three broad questions: (1) how did Plaintiffs represent their working relationship to the Internal Revenue Service (“IRS”); (2) whether Plaintiffs derive income from other sources; and (3) whether Plaintiffs take tax deductions for business expenses. Plaintiffs concede that they filed their tax returns as independent contractors. (See Joint Statement on Pls.' Tax Returns at 8 & n.1 (“Defendant thus seeks full tax returns to confirm an already undisputed fact: that Plaintiffs filed as independent contractors and never claimed to be [Defendant's] employees on their tax forms.”).) Thus, Plaintiffs' full tax returns are not relevant because this fact is undisputed. The Court also finds Plaintiffs' personal and business tax returns are not relevant for the purposes of demonstrating Plaintiffs' business expense deductions, investments, gains, losses, and other tax payments. The tax returns are irrelevant for these purposes because Plaintiffs are not seeking to recover these deductions and payments as damages in this case. Thus, they bear no relevance on Plaintiffs' claims or Defendant's defense. As for whether Plaintiffs derived other income aside from Defendant, the Court finds that this is relevant to Plaintiffs' employment status, which is directly at issue in the Complaint. (See Compl. ¶¶ 89–91, 118–21.)

*3 Turning next to the question of whether Defendant can obtain information on Plaintiffs' outside income elsewhere, the Court concludes that it can. Plaintiffs have identified alternate means for obtaining this information by offering to provide certain tax documents, including 1099s, W-2s, and K-1s. Notably, Plaintiffs do not oppose Defendant's request for documentation that shows whether Plaintiffs earned any income working for other hospitals. (See Joint Statement on Pls.' Tax Returns at 8.) They assert that Plaintiffs' and their business entities' 1099s, W-2s, and K-1s provide “all information about income received from various entities and wages paid relating to [the] same.” (Id.) The Court agrees. Thus, these documents are sufficient to provide the information that Defendant seeks, and Plaintiffs' full tax returns are protected by qualified privilege. The Court holds that Defendant's tax returns are protected, for similar reasons—they are not relevant to this case, and, therefore, are protected by qualified privilege and not subject to discovery.

The Court finds that both Plaintiffs' and Defendant's tax returns are protected by qualified privilege. Accordingly, neither Plaintiffs' nor Defendant's full tax returns are discoverable at this time. The Motions (ECF Nos. 34, 35) are hereby RESOLVED.

The Clerk is DIRECTED to send a copy of this Memorandum Order to all counsel of record.

It is so ORDERED.

Richmond, Virginia