Damages & Wage Loss

On March 25, 2014, the U.S. Supreme Court held that severance payments provided to a terminated employee are taxable. U.S. v. Quality Stores, Inc. 134 S.Ct. 1395 (2014). This case involved severance payments to employees laid off before and during bankruptcy proceedings. The size of the payments were determined by job security and length of employment. Given this case, most “severance payments” will be construed as taxable wages, wherein an employer should issue a W-2 and withhold taxes.

However, there certainly may be situations in which payments received from an employer at or around termination – at least some of the payment – may not be taxable wages. For example, if an employee is provided payment in lieu of a pending or possible discrimination claim, this payment certainly might contemplate payments for some combination of lost wages, emotional distress and/or attorney’s fees. What the payment is actually intended to cover may vary in each situation. Thus, it is important to look at the underlying nature of the payment in order to determine whether a payment is taxable wages. And, as a precaution, it is important to clarify what the payment is for – preferably in a writing between the parties.

Alas, it is also important to note that even if a payment is not “taxable wages”, there will most likely be taxes that are still due! For example, most emotional distress awards/settlements are taxable, just not taxable as wages. It is best to check with an employment lawyer and/or an accountant about this.

Hoffman Plastic Compounds, Inc. v NLRB, 535 U.S. 137 (2002) created some bad law when it held that the NLRB cannot award a backpay remedy to an employee who was not legally authorized to work in the United States. Since then employers have had a field day in cases where they “suspect” that an employee, seeking a remedy under the NLRB, federal or state anti-discrimination or civil rights acts, is not legally authorized to work. Employers have gone to town trying to uncover evidence that employees are not legally authorized to work, in the hope that they will, therefore, not have to pay up for their illegal actions.

Flaum Appetizing Corporation, 357 NLRB No. 162 (Dec. 30, 2011) has put some procedural brakes on this railroad by holding that an employer who claims that it need not pay backpay because an employee is not authorized to work in the U.S. cannot just make such a claim up out of whole cloth. The employer must set forth with specificity the basis for this defense. The opinion observed that, to hold otherwise, would permit a “fishing expedition”, relying on its decision in Murcel Manufacturing Corp., 231 NLRB 632 (1977). The Board noted that allowing an employer to simply make a claim without any foundation makes no sense in light of the fact that it was the employer’s obligation to begin with to verify the employability of the employee when hiring.

Flaum gives just a little love to undocumented employees, as well as to documented employees subject to stereotypes that they are not authorized to work because of their national origin.

Articles Posted in Damages & Wage Loss

U.S. Supreme Court Rules That Severance Payments are Taxable Wages

NLRB Rules That Employer Cannot Simply Claim That an Employee is Not Authorized to Work Under Immigration Laws to Engage in a Fishing Expedition Regarding an Employee’s Immigration Status