What are Punitive Damages in a Class Action Settlement?
By Timo Bakker · July 6, 2026 · 4 min read
Compensatory damages restore what you lost. Punitive damages are extra money designed to punish the defendant. Here is how they work in class action settlements.
Compensatory vs punitive
- Compensatory damages restore the plaintiff to whole. If you were overcharged $50, compensatory damages are $50.
- Punitive damages punish the defendant. Awarded when the defendant's conduct was outrageous, willful, or reckless. Meant to deter future bad behavior.
When punitive damages appear in class actions
Rarely in consumer class actions — most cases settle before trial, and punitive damages are typically awarded only at trial. When they do appear (often in wage and hour or discrimination cases that go to trial), they can add 30-100% to the total recovery.
Constitutional limits
The Supreme Court (BMW v. Gore, 1996; State Farm v. Campbell, 2003) has ruled that punitive damages generally should not exceed 9x the compensatory damages, and usually should be less than 4x for wealthy defendants. These are guidelines, not hard limits.
In settlement negotiations
Class counsel often uses the threat of punitive damages as leverage in settlement negotiations. Defendants agree to higher compensatory-only settlements to avoid the risk of large punitive verdicts at trial.
Tax treatment
Punitive damages are always taxable as ordinary income (unlike compensatory damages for personal injury, which are not).