Category Archives: Montana

March 26, 2015

Supreme Court: Pregnant Worker With Lifting Restrictions May Continue Lawsuit

In a divided decision, on March 25, 2015, the U.S. Supreme Court released a long-awaited ruling involving a pregnant worker’s claim under the Pregnancy Discrimination Act (PDA). In its ruling, the Court held that the worker could proceed with her lawsuit, because disputes remain as to whether her employer treated more favorably at least some non-pregnant employees whose situation could not reasonably be distinguished from hers.

The majority of the Court forcefully rejected the 2014 guidance of the Equal Employment Opportunity Commission (EEOC) concerning the application of Title VII and the Americans with Disabilities Act (ADA) to the PDA, as it fell short on a number of fronts needed to “give it power to persuade.” Without ruling for either party, the Court adopted a new standard for courts to use when deciding PDA cases brought under a disparate treatment theory. Young v. UPS, 575 U.S. ___ (2015).

Despite the Court’s guidance, employers still will face many questions on what accommodations will be required in the future. The standards for “disparate treatment” and “disparate impact” cases may be more confusing in the future for employers who need to make decisions regarding whether and how to accommodate pregnant employees. As a result, employers are wise to respond carefully to accommodation requests by pregnant workers. Employers should review any policies that might have a disproportionate effect on pregnant workers, such as rules limiting job accommodations. In addition, employers should be careful to review restrictions on use of sick pay/sick time, leave eligibility outside of FMLA, lifting restrictions, and light duty assignments to determine: (1) if they disparately affect pregnant employees while accommodating others; and (2) what “strong” business rationale you can offer to defend the distinction.

For additional analysis of the Court's opinion and what it means for employers, please see our full article here.

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March 23, 2015

FMLA and FLSA Lawsuits Are Increasing

By Mark Wiletsky

The U.S. federal courts saw a whopping 26.3 percent increase in the number of Family and Medical Leave Act (FMLA) lawsuits filed last year over the prior fiscal year, according to statistics recently released by the Administrative Office of the U.S. Courts. Wage and hour lawsuits alleging a violation of the Fair Labor Standards Act (FLSA) were up a significant 8.8 percent. These filings are the highest they’ve been in the past 20 years of annual statistics reported by the courts.

The increasing numbers of lawsuits brought under those two employment laws may reflect how difficult it is to understand and administer wage and hour and leave laws. The increase also may be due to the heightened awareness by workers of their rights and benefits under these laws. Regardless of the cause of the increase, the numbers suggest that it is worthwhile for employers to focus their compliance efforts in these two areas.

Self-Audit Your Pay and Leave Practices

Before you find yourself defending a lawsuit, take the time to review your payroll and FMLA policies and practices, including these often tricky issues:

Classifying workers as exempt versus non-exempt from minimum wage and overtime pay requirements
Calculating each non-exempt employee’s regular rate of pay and overtime rate
Rounding time at the beginning and end of shifts
Automatic deductions for meal periods
Treating workers as independent contractors rather than employees
Tracking time worked remotely or “off-the-clock”
Providing FMLA notices within required time period
Calculating FMLA leave for workers with irregular schedules
Administering intermittent FMLA leave
Not penalizing employees who have taken FMLA leave

If your self-audit reveals any irregularities, take steps to revise your policies and practices to bring them into compliance with the applicable laws. Don’t forget state and local laws that may impose additional requirements related to pay and leave administration. If in doubt, don’t hesitate to consult with your legal counsel so that you don’t become one of next year’s statistics.

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March 9, 2015

DOL May Issue Interpretations of FLSA Exemptions Without Notice-and-Comment Process

By Mark Wiletsky

Today the Supreme Court sided with the U.S. Department of Labor (DOL), holding that a federal agency’s interpretive rules are exempt from notice-and-comment rulemaking procedures. Perez v. Mortgage Bankers Ass’n, 575 U.S. ___ (2015). The Court’s decision means that the DOL (and other federal agencies) may issue initial and amended interpretive rules without advance notice and without considering input from interested parties.

DOL “Flip-Flopped” on Interpretive FLSA Rule

In this case, the Mortgage Bankers Association (MBA) challenged the DOL’s most recent interpretation on whether loan officers fell within the Fair Labor Standards Act (FLSA) administrative exemption following a series of “flip-flops” in the DOL’s interpretation. In 1999 and 2001, the DOL issued opinion letters stating that mortgage-loan officers do not qualify for the administrative exemption to overtime pay requirements. After new regulations regarding the exemption were issued in 2004, the MBA requested a new interpretation under the revised regulations. In 2006, the DOL issued an opinion letter in which it changed its position, deciding that mortgage-loan officers do qualify for the administrative exemption. In 2010, however, the DOL changed its interpretation again when it withdrew the 2006 opinion letter and issued an Administrator’s Interpretation without notice or comment stating that loan officers once again do not fall within the administrative exemption.

The MBA sued the DOL, claiming that the DOL needed to use the notice-and-comment process established by the Administrative Procedure Act (APA) when it planned to issue a new interpretation of a regulation that differs significantly from its prior interpretation.

Distinction Between Legislative Rules and Interpretive Rules

In a unanimous decision, the U.S. Supreme Court ruled that the text of the APA specifically excludes interpretive rules from the notice-and-comment process, so the DOL was free to change its interpretation on loan officers qualifying for the administrative exemption without providing advance notice or seeking public comment first. The Court pointed to the difference between “legislative rules” that have the force and effect of law, which must go through the notice-and-comment period, and “interpretive rules” that do not have the force and effect of law and, therefore, are not subject to the notice-and-comment obligation.

Finding that the clear text of the APA exempted interpretive rules from the notice-and-comment process, the Court overruled prior precedent in a line of cases that has come to be known as the Paralyzed Veterans doctrine. Under that doctrine, if an agency had given its regulation a definitive interpretation, the agency needed to use the APA’s notice-and-comment process before issuing a significantly revised interpretation. The Court’s ruling today specifies that no notice or comment process is needed for interpretive rules, whether it is an initial interpretation or a subsequently revised one.

Implications of Court’s Decision

Today’s ruling means that the DOL’s interpretation excluding mortgage-loan officers from the administrative exemption stands. More broadly, it means that federal agencies, such as the DOL, are permitted to issue and amend interpretations of their regulations that will take effect immediately without any advance notice to the regulated parties. Accordingly, employers should stay on top of new developments so as not to miss any new regulatory interpretations that may impact their employment practices.

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February 23, 2015

Exempt Employee Salary Deductions for a Reduced Schedule

By Brad Cave

Classifying an employee as exempt under the Fair Labor Standards Act (FLSA) comes with a trade-off. Most employers know that exempt employees are not entitled to overtime. But, in exchange for that benefit, the FLSA limits employers’ ability to reduce the exempt employee’s salary, even when they are not coming to work. However, exempt employees are not immune from needing time off of work to recover from a medical condition, to settle an aging parent into an assisting living arrangement or to handle a long-term behavioral issue with a child. If an employee seeks some time off each week to take care of such matters, you may agree to allow the employee to work a reduced work schedule for a period of time. But when payday rolls around, must you pay the employee his or her full weekly salary or can you deduct pay to reflect the reduced work schedule? Missing this answer can have significant ramifications for the employee’s exempt status.

FLSA Salary Basis

Under the Fair Labor Standards Act, exempt employees’ pay must meet the salary basis test, which means that the employee must receive a predetermined amount of salary for each workweek, without reductions because of variations in the quality or quantity of work during the week. Thus, deductions from salary for reduced working hours is generally not permitted under the salary basis test. Deducting pay for the missed time could result in the loss of the employee’s exempt status. However, two exceptions may apply to your employee.

FMLA Leave Can Result in Pay Deduction

If the employee’s reduced schedule constitutes unpaid leave under the Family and Medical Leave Act (FMLA), the FLSA regulations permit employers to “pay a proportionate part of the full salary for time actually worked” without risk to the exempt status. This means that if your employee is missing work for an FMLA-qualifying reason, you may deduct pay from their weekly salary to reflect the unpaid FMLA leave time.

PTO, Sick Leave or Other Paid Leaves

If the employee has accrued PTO, sick leave or another type of company-provided paid leave, you can require that the employee use such paid leave to cover the partial day absences, as long as the employee continues to receive the full amount of their weekly salary. And, once the employee uses up all of their accrued paid leave, you can make salary deductions for full-day, but not partial-day, absences.

Saved Wages Vs. Loss of Exempt Status

Deductions from an exempt employee’s salary should be made only after careful consideration of the potential consequences. After all, the salary you save now for missed time may seem trivial if you lose the exempt status of this and all similarly-situated employees and owe them overtime for the past two years.

October 28, 2014

Defeating Micro-Units: Employer Strategies to Challenge Smaller Bargaining Units

By Brian Mumaugh

Unions are organizing smaller segments of an entire workforce in order to get their foot in the door and keep organizing efforts alive. The National Labor Relations Board (NLRB or Board) has approved so-called micro-units, setting employers up for difficult battles over appropriate bargaining units in the future. Employers should think about the possibility of seeing a micro-unit proposed in their workforce—and how to avoid them.

Unions Can More Easily Win Representation For Smaller Groups

As unions press to increase their membership in the United States, unions are looking for new ways to organize workers and remain relevant. Organizing large workforces requires unions to expend significant resources – money, personnel and time – to collect signatures from at least 30% of the proposed bargaining unit to trigger an election (some unions want to see upwards of 70% signing authorization cards before petitioning for an election). Then additional resources are needed to get out the vote to ensure a majority of votes cast are in favor of the union. Large organizing campaigns also give the company time to mount an anti-union campaign.

Organizing micro-units, however, can be done relatively quickly, cheaply and often without much response from the company. Think about it – organizing a unit of 30 workers in a single department may need only one or two union organizers to persuade the 15 to 20 employees needed to win the organizing campaign. Before you know it, you’ve got a segment of your workforce represented by a third party with whom you must collectively bargain. This can lead to multiple micro-units at your company represented by different unions and the headaches multiply.

Parameters For Micro-Units Are Evolving

The NLRB has discretion in representation cases to determine the appropriate bargaining unit, whether an employer unit, craft unit, plant unit or subdivision thereof, pursuant to section 9(b) of the NLRA. Although decided on a case-by-case basis, the main, long-standing factor for determining an appropriate unit was the “community of interest” of the employees involved. In 2011, however, the Board significantly changed that analysis in a case called Specialty Healthcare, allowing the unit petitioned-for by the union to govern except in those situations where the employer can establish by “overwhelming evidence” that the requested unit is inappropriate. This new approach places a high burden on employers who wish to challenge the make-up of the unit proposed by the union.

In recent months, the Board has decided a couple of micro-unit cases that offer some guidance on what it takes to challenge a micro-unit. In a case involving a Macy’s Department store in Massachusetts, the Board deemed appropriate a micro-unit made up of only cosmetics and fragrances employees at the store. Macy’s Inc., 361 NLRB No. 4 (July 22, 2014). The store argued that the unit was too narrow and that the appropriate unit in a retail store context is a “wall-to-wall unit” or, alternatively, all selling employees at the store. The Board did not agree. It concluded that the cosmetics and fragrances employees were a readily identifiable group that shared a community of interest not shared by other store employees. Factors weighing in favor of the micro-unit included the fact that the cosmetics and fragrances employees were in the same department and were supervised by the same managers. In addition, there was little regular contact between the cosmetics and fragrances employees and other store employees. The NLRB found that Macy’s had not met the high burden of showing that other employees should be included in the unit because they did not share an “overwhelming community of interest.”

Coming to the opposite conclusion, however, the Board rejected a micro-unit of sales associates who sold shoes at the Manhattan Bergdorf Goodman store. The union had petitioned for the unit to be made up of 35 women’s shoes sales associates in the Salon shoes department (high end designer shoes) and 11 women’s Contemporary shoes sales associates in the Contemporary Sportswear department (modestly priced shoes). The Board concluded the proposed unit was inappropriate because the two shoe departments were located on separate floors, did not share the same supervisors and managers, did not have any cross-over or interchange between employees and did not have much contact with employees in other departments storewide. The Neiman Marcus Group, Inc. d/b/a Bergdorf Goodman, 361 NLRB No. 11 (July 28, 2014).

Strategies for Attacking Micro-Units

The Macy’s and Bergdorf Goodman cases offer some guidance to help employers avoid union organizing of micro-units. Strategies to consider now, before a union organizing campaign begins, include:

Combining departments or job classifications that share skills or tasks
Cross-training and cross-utilizing workers across departments, classifications or locations
Allowing for promotional and transfer opportunities across department and organizational lines
Revising supervisory and managerial structures so that more employees report to the same managers
Maintaining pay and bonus structures common to all employees or for all in a larger unit.

Micro-units can be a game-changer when it comes to union organizing so employers have to change their own tactics to combat such bargaining units. Taking time now to change organizational and reporting structures can go a long way in overcoming a proposed micro-unit in the future.

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September 9, 2014

Employee Equity Purchase Programs: Ensuring a Great Idea Remains a Good Idea

By Bret Busacker

With the return of some prosperity in the economy, we have seen an uptick in employers granting or selling equity (stock or partnership interests) in their businesses to their employees. In some cases, these grants are part of a broad-based employee stock purchase program. In other cases, employers use equity to reward and incentivize key players in their business. In all cases, these programs can be very successful in creating loyalty and incentivizing employees. However, these arrangements are subject to a variety of regulatory requirements. A few insights on some common issues that arise with respect to these arrangements:

Sale of Equity to an Employee May be Compensation. The transfer of equity to an employee (or other service provider) in connection with the performance of service to the employer is a compensatory transaction under Internal Revenue Code Section 83. The amount of the compensation income to the employee is the difference between the fair market value of the equity at the time of grant and the amount the employee pays for the equity. Depending on the situation, an independent valuation of the business may be necessary to establish the fair market value of the equity granted. In all cases, the employer should document that a reasonable valuation method was followed in establishing the fair market value of the equity.

Employees May Elect Early Taxation of Unvested Equity. If an equity award requires the employee to continue to provide services after the date of grant in order for the employee to retain the right to the equity, the equity may be unvested. Unvested equity is not taxable to the employee at the time of grant, but becomes taxable to the employee once the equity vests. An employee who believes an equity award will increase in value and generate a larger tax hit on the vesting date rather than the grant date may elect to accelerate the taxation of the equity to the date of grant (and thus pay taxes when the equity is worth less). This election is commonly referred to as an 83(b) election. Employers should ensure that employees are aware of the 83(b) election option.

Unvested Equity May Not Create Ownership. The Internal Revenue Code provides that an employee is not treated as the owner of the equity granted to an employee unless the equity is fully vested or the employee files an 83(b) election with the IRS. Further, employment agreements, operating agreements and shareholder agreements often contain provisions that create ambiguity as to whether an equity award is vested or unvested. Accordingly, if the parties want to ensure that an employee receiving an equity grant is treated as an owner for tax purposes, including allocations, distributions and dividends, a protective Section 83(b) election could be filed to ensure the employee is treated as the owner of the equity.

Equity Grants May Impact Employee Benefits. Equity grants of partnership interests or stock in an S corporation may have a significant impact on the medical and fringe benefits of employees receiving those grants. If the equity is vested or the employee files an 83(b) election, the employee may be treated as an owner for benefits purposes. Partners in a partnership and owners of more than 2% of the stock of an S corporation are generally not eligible to participate on a pre-tax basis in the medical benefits and other fringe benefit programs otherwise available to employees. In addition, employers should review their retirement plans when granting equity awards to employees to ensure that the compensatory value of the equity awards are accounted for in accordance with the terms of the plan document.

Equity Grants Should Be Accomplished Through a Compensatory Plan. In general, unless securities exemptions exists at both the state and federal levels, the grant or sale of employer stock or partnership interests to employees must be registered under the Securities Act of 1933. This rule applies to private non-publicly traded companies as well as publicly traded companies. Many private companies may take advantage of a special federal securities exemption from the registration requirement by satisfying what is referred to as Rule 701. However, Rule 701 and many state securities laws may only be relied upon if the grants were made pursuant to a written compensation contract or compensatory benefit plan for employees, consultants and/or directors. Further, in some cases it may be required, but it is always a good practice, to provide the award recipients a summary of the material terms of the equity award, a risk of investment statement, and annual financial statements to minimize misunderstanding and the risk of legal claims.

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September 2, 2014

Benefit Plans: Upcoming Compliance Deadlines and End of Year Planning

By Bret Busacker and Bret Clark (formerly of Holland & Hart)

Now that fall is in the air and school has started, we thought this would be a good time to summarize some of the key health and welfare benefit deadlines that are approaching this fall:

September 22

Updated Business Associate Agreements. New HIPAA privacy and security rules adopted last year require revisions to most HIPAA business associate agreements by September 22, 2014. Employer-sponsored health plans that are subject to HIPAA (generally including self-insured health plans and all health flexible spending arrangements (FSAs)) are required to have agreements with business associates, service providers dealing with participant health information on behalf of the plan, that require business associates to comply with the HIPAA privacy and security rules. Your business associates may have already contacted you about revising your agreements. However, employers are ultimately responsible to identify all business associates and ensure that compliant business associate agreements are in place before the deadline.

September 30

Summary Annual Report for Calendar Year Plans. Plans (including retirement plans and welfare plans) that filed the 2013 Form 5500 by July 31, 2014 must provide the Summary Annual Report for the 2013 calendar year to plan participants no later than September 30, 2014. Plans that file the 2013 Form 5500 extension to file by October 15, 2014 must provide the Summary Annual Report by December 15, 2014.

October 14

Medicare Part D Notice of Creditable Coverage. Employers who offer prescription drug coverage to employees and retirees should provide a notice to plan participants and beneficiaries who are eligible for Medicare Part D (or to all participants) by October 14, 2014 stating whether the employer prescription drug coverage is creditable coverage.

November 5

Deadline to Obtain Health Plan Identifier. All self-insured larger group health plans (those with annual costs of $5 million or more) must obtain a unique group health plan identification number (HPID) from CMS by November 5, 2014. The HPID will be used in electronic communications involving plan-related health information. For this reason, third party administrators of self-insured plans will either obtain the HPID or will coordinate with the plan sponsor in obtaining the HPID. Employers should confirm with their TPA that the plan will have an HPID by the deadline. Please note that employers should obtain an HPID for each group health plan they maintain. Accordingly, employers who have established a single wrap-around group health plan that incorporates all of the group health plans of the employer may only need to obtain a single HPID. However, employers who maintain separate HRA, FSA, and/or medical/dental/vision plans may be required to obtain one HPID for each such group health plan. Smaller group health plans have until November 5, 2015 to obtain an HPID. Please go to this website for more information.

November 15

Transitional Reinsurance Fee Enrollment Information Due. Self-insured health plans must submit their enrollment information to HHS by November 15, 2014 for purposes of calculating the 2014 Transitional Reinsurance fee for 2014. Self-insured health plans that are self-administered are exempt from the Transitional Reinsurance Fee in 2015 and 2016, but must pay the fee for 2014. Based on the enrollment information provided to HHS in 2014, self-insured plans will pay the fee beginning in January 2015.

General Fall Planning (no specific deadline)

ACA Shared Responsibility Planning. The Affordable Care Act employer shared responsibility penalties will begin to be imposed on employers with 100 or more full-time or full-time equivalent employees beginning January 1, 2015. Employers should start now to establish a policy for purposes of determining whether the employer will be subject to the ACA employer shared responsibility penalties and whether the employer is covering those full-time employees that must be offered coverage in order to avoid the shared responsibility penalty.

Summary of Benefits and Coverage, Women’s Health and Cancer Rights Act Notice, Medicaid/CHIP Premium Assistance Notice, HIPPA Notice of Privacy Practices, and Exchange Notice. Employers should confirm that these notices are included with the enrollment materials provided to participants during open enrollment and to participants at the time of any mid-year enrollment due to becoming newly eligible for the plan. If these notices are not included with enrollment materials prepared by your provider, consider supplementing the enrollment materials with these notices. Employers should also confirm that their COBRA notices have been updated to reflect recent changes to the model COBRA notice to reflect the establishment of the Health Marketplace Exchanges.

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June 16, 2014

Sexual Orientation Discrimination By Federal Contractors To Be Prohibited, According to News Reports

By Brad Cave

Major news sources are reporting that President Barack Obama plans to issue an executive order prohibiting federal contractors from discriminating against employees based on sexual orientation and gender identity. The specific details of the executive order have not been finalized and the signing date is not yet known. The planned order was revealed by administration officials on Monday, June 16, 2014, just before the President attends a lesbian, gay, bisexual and transgender (LGBT) event sponsored by the Democratic National Committee in New York City on Tuesday.

For twenty years, various federal lawmakers have introduced and tried to pass ENDA, the Employment Non-Discrimination Act, which would prohibit employment discrimination on the basis of sexual orientation by all employers with 15 or more employees. The most recent ENDA bill passed in the Senate but is dead in the House, as House Speaker John Boehner reportedly has said he will not allow the bill to come to a vote. Like it has done with its minimum wage and other pay initiatives that stalled in Congress, the White House is furthering its goals for U.S. workers outside the legislative process by issuing an executive order. Although the executive order applies only to federal contractors, many of whom already have policies prohibiting discrimination based on sexual orientation, the prohibition for contractors on this basis is seen as a step toward protection for LGBT workers in all work contexts.

Hearing word of the impending executive order, lawmakers and various groups appear to be urging the administration to include an exemption for religious reasons. That is unlikely to happen with the executive order but until we see the final order, it is unclear if any federal contractors and subcontractors will be exempt. We will keep you posted as this unfolds.

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May 6, 2014

Separation Agreements Targeted By EEOC Again

By Mark Wiletsky

The Equal Employment Opportunity Commission (EEOC) recently filed a lawsuit seeking to stop a Colorado employer from using its form separation and release agreement and to allow employees who have signed the form agreement to file charges of discrimination and participate in EEOC and state agency fair employment investigations. In its federal court complaint, the EEOC alleges that CollegeAmerica Denver violated the Age Discrimination in Employment Act (ADEA) by conditioning employees’ receipt of severance benefits on signing a separation and release agreement which, according to the EEOC, chills and interferes with the employees’ rights to file charges and/or cooperate with the EEOC and state fair employment practice agencies.

As we wrote on this blog earlier, the EEOC has been scrutinizing employers’ separation agreements. This is the second such lawsuit challenging language in the separation agreements that does not permit the filing of discrimination or retaliation charges with the EEOC or other government agencies. As in the EEOC’s earlier complaint against a national pharmacy, the recent complaint against CollegeAmerica Denver targets numerous provisions in the separation agreement, including the release of claims, a non-disparagement clause and provisions in which the employee represents that he/she has not filed any claims, has disclosed to the company all matters of non-compliance and will continue to cooperate with and assist the company with any investigation or litigation.

Many of the targeted provisions are standard clauses in form separation agreements. Although it remains to be seen whether the courts will agree with the EEOC’s claims, it is always a good idea for organizations to review their agreements and ensure they do not raise any red flags for the EEOC while still protecting the company from future payouts for employment-related claims. We will continue to provide updates as new developments arise.

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April 3, 2014

Severance Payments Are Wages Subject to FICA Tax

By Arthur Hundhausen and Mark Wiletsky

Employers offer severance payments to separating employees for numerous reasons, including rewarding long-time employees affected by a plant closure, to maintain goodwill, to secure a release and waiver of existing or potential claims, or to comply with company policies or agreements that require such payments. But whether the severance is dictated by policy or an individually-negotiated benefit, one sticky issue that employers may neglect to address is whether severance payments are subject to FICA taxes. The U.S. Supreme Court recently settled that issue by confirming that severance payments made to employees terminated against their will are taxable wages under FICA. United States v. Quality Stores, Inc., No. 12-1408, 572 U.S. ___ (2014). The Supreme Court’s ruling was consistent with the longtime IRS historical position on this issue.

Involuntary Terminations Due to Bankruptcy Triggered Severance Payments

Quality Stores terminated thousands of employees in connection with its involuntary Chapter 11 bankruptcy filing in 2001. The employees received severance payments under one of two plans, ranging from six to eighteen months of severance pay. Initially, Quality Stores reported the severance payments as wages for FICA purposes on the Forms W-2 filed with the IRS and the employees. Consistent with such reporting, Quality Stores paid the employer’s required share of FICA taxes and withheld the employees’ share of FICA taxes as well. Quality Stores then decided to file FICA tax refund claims with the IRS, totaling over $1 million in paid FICA taxes. The IRS neither allowed nor denied the refund claims, so Quality Stores sought a refund as part of its bankruptcy proceeding. Both the District Court and the Sixth Circuit Court of Appeals concluded that severance payments were not “wages” under FICA, meaning Quality Stores and its affected employees were entitled to a refund of the FICA taxes paid.

The Sixth Circuit’s decision, however, directly contradicted rulings by other Courts of Appeals, which concluded that at least some severance payments constitute “wages” for purposes of FICA taxes. The U.S. Supreme Court agreed to review the issue to resolve the split among the courts.

FICA’s Broad Definition of Wages Includes Severance Payments

FICA defines wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” Under the plain meaning of this definition, the Court found that severance payments made to terminated employees constitutes “remuneration for employment.” The Court noted that severance payments are made to employees only, often will vary depending on length of service, and are made in consideration for past services in the course of employment.

Looking at statutory history, the Court noted that in 1950, Congress repealed an exception from “wages” for “[d]ismissal payments which the employer is not legally required to make” from the Social Security Act and since that time, FICA has not excepted severance payments from the definition of “wages.” Agreeing with the government’s position in the case, the Court ruled that severance payments are taxable wages for FICA purposes.

Implications for Employers

The Court’s ruling confirms that employers are obligated to pay their portion of FICA taxes and withhold the employees’ portion of FICA taxes from severance payments. Depending on the amount of the severance at issue, this FICA obligation can greatly change the total payout amount for the employer. It also can catch unknowing employees off guard if they are expecting to receive a higher severance payment without FICA taxes being withheld. Employers should factor the FICA tax obligation into any severance offer to ensure that both the company and the separating employee understand the total amount that is at issue and the final amount that the employee will receive. In addition, employers offering severance payments should review their policies and practices to ensure that proper tax payments are made.

If employers identify past severance payments where no FICA taxes were paid or withheld, such employers should consult with their tax counsel to determine whether any corrective steps are required. In general, the applicable statute of limitations for an employer’s payroll tax liability begins on April 15 of the year following the year in which wages are paid (when prior year payroll tax returns are “deemed” to be filed), and expires after three years. For example, the applicable statute of limitations for payroll taxes owed for 2010 began on April 15, 2011 and expires on April 15, 2014.

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