Former Houston Internal Revenue System (IRS) agent Kanwaljeet Tagore, 41, currently works's as a self employed tax consultant in Houston.
The settlement announced Thursday expunges Tagore's firing from her record, allows her to enter federal buildings with the ceremonial dagger for a period of three years and awards her lawyers USD 400,000 for fees and expenses.
Tagore, however, will be barred from seeking re-employment with the IRS, but may seek work with other federal agencies. Tagore filed the lawsuit in 2009.
Houston lawyer Scott Newar, who worked with attorneys from the Becket Fund for Religious Liberty, said the case prompted Federal Protective Services to acknowledge for the first time that wearing a 'kirpan' is protected under the Religious Freedom Restoration Act.
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This week's settlement grew out of a trial ordered by the 5th US Circuit Court of Appeals, which last year partially reversed a lower court's summary judgment dismissing Tagore's lawsuit.
"The government doesn't get to say that sharp knives are OK if they are brought in to cut birthday cakes, but dull kirpans aren't OK because they are religious items," he said.
"The settlement confirms that religious freedom is not a second-class right."
The 'kirpan' is a ceremonial sword or dagger carried by baptised Sikhs. They must wear five articles of faith at all times, the 'kirpan' being one of them.