Sunday, July 31, 2016

Are Judgments or Settlements Under Family and Medical Leave Act Subject to W-2 Taxes and Withholding or Should They be Paid Under a 1099?

Verdicts, Awards and Settlements Paid Pursuant to Claims Made Under Title VII, the Americans With Disabilities Act and the Age Discrimination in Employment Act Are to be Treated as Ordinary Income Subject to Ordinary Taxes and Withholding and Paid Under a Form W-2

DISCLAIMER:  I am NOT a licensed tax attorney.  This Post is based solely upon my interpretation of the cases and statutes discussed herein.  Seek out a tax professional if you require guidance as to any issue discussed below.


I am NOT a Tax Expert!

Since the enactment of the Small Business Job Protection Act of 1996, it is universally understood that awards or settlement paid to resolve employee claims brought under Title VII and its progeny (such as the with legislation prohibiting pregnancy, age, and disability discrimination (i.e. Pregnancy Discrimination Act of 1978, Age Discrimination in Employment Act, Americans with Disabilities Act of 1990, etc.) must be treated as ordinary income and are thus subject to ordinary taxes and withholding, i.e. must be paid under a W-2.  That is so because such statutes provide that an employee may recover "back wages."


Discrimination Awards and Settlements Taxable as Ordinary Income
and Subject to W-2 Withholding
However, insofar as the tax treatment of recoveries made by employees are concerned, the Family and Medical Leave Act (which is not part of the Title VII tapestry of civil rights' laws), has long been viewed differently by the federal courts sitting in Philadelphia.

That is so because the FMLA provides that employees may not recover "back pay," but, rather, damages "equal to the amount of ... any wages, salary, employment benefits, or other compensation denied or lost to such employee by reason of the violation."


Recovery Under FMLA Treated Differently
The Majority View of the Federal Courts Sitting in U.S. Third Circuit, Which Covers Federal Lawsuits Brought in Pennsylvania, Delaware, New Jersey and the Virgin Islands, is That Money Recovered by Employees in Family and Medical Leave Act Cases is to be Treated as 1099 Miscellaneous Income

In a 1998 decision, Churchill v. Star Enterprises, federal judge Harvey Bartle III engaged in a thorough analysis of the Internal Revenue Code before holding:

In deciding this pending motion, we do not pass on what, if any, taxes or FICA contributions plaintiff may owe on the monies received as a result of the judgment. See Schleier, 515 U.S. at 331, 115 S.Ct. 2159; United States v. Burke, 504 U.S. 229, 237, 112 S.Ct. 1867, 119 L.Ed.2d 34 (1992). We simply hold that no withholding is mandated under federal or state law. Defendants are obligated to pay to plaintiff the entire amount of the judgment plus appropriate post-judgment interest.

Since Churchill was decided, it has been called into question, but has never been overruled by any court of higher jurisdiction, such as the United States Court of Appeals for the Third Circuit, or the United States Supreme Court.

Judge Bartle's 1998 Decision in Churchill
Reaffirmed in July 2016 Decision 
Notwithstanding Churchill, however, I have frequently had a difficult time convincing counsel for companies with whom I am settling FMLA claims on behalf of my employee clients that the entire settlement should be treated as 1099 income.  Instead, the most common outcome is an agreement that some percentage of the settlement funds will be paid under a 1099, with the balance to be subjected to ordinary taxes and withholding and paid under a W-2.

A July 2016 Decision by a Federal Judge in Philadelphia Holds That a Settlement Made on a Claim Brought Under the FMLA is NOT to be Treated as Ordinary Income Payable Under a W-2 and Should Instead be Paid as Miscellaneous Income Under a 1099

In Gunter v. Cambridge-Lee Industries, a decision rendered by federal Magistrate Judge Henry S. Perkins on July 14, 2016, the court analyzed Churchill and its progeny, before holding:

As such, after review of the two competing lines of cases regarding withholding, the Court finds Churchill and Carr and their emphasis on the unique language of the FMLA persuasive, distinguishing it from other employment statutes to be persuasive and will follow the holdings of those cases. We, therefore, hold that no withholding is required for the proceeds of the settlement in this case payable to the plaintiff.

At this point, it is fair to conclude that, until overruled, the rule announced in Churchill and reaffirmed in Gunter, is the law of the land -- at least in the Third Circuit -- judgments or settlements on claims made under the Family and Medical Leave Act should be paid out as miscellaneous income under a 1099, and not as wages subject to ordinary taxes and withholding paid under a W-2.


Helping Pennsylvania Workers With FMLA Issues Since 1991

Philadelphia Area Family and Medical Leave (FMLA) Attorney Helping Employees With Leave Requests and Short-Term Disability Applications

John A. Gallagher is an employment lawyer who represents claimants in Pennsylvania. 

John typically represents workers who need an employment lawyer throughout Southeastern Pennsylvania, including those working in Philadelphia County, Delaware County, Montgomery County, Bucks County, Chester County, Berks County and Lancaster County.

Pennsylvania FMLA/Disability Lawyer Provides Free Telephone Consultations and Contingent Fee Representation

If you believe you require guidance concerning a Family and Medical Leave Act issue, and reside in or near Southeastern Pennsylvania, feel free to send me an e-Mail or give me a call.  I have represented workers who live or are employed in or near Reading, Bryn Mawr, Devon, West Chester, Philadelphia, Allentown, Bethlehem, Lancaster, Levittown, Limerick, Abington, Allentown, Collegeville, Downingtown, Blue Bell, Eagleville, Norristown, Springfield, Drexel Hill, Oaks, Doylestown, Coatesville, Lionville, Newtown Square, Broomall, Aston, Avondale, Media, Norristown, Cheltenham, Chester Springs, Audubon, Ambler, Chadds Ford, Berwyn, Malvern, Paoli, Manayunk, Roxborough, Havertown, Haverford, Lansdowne, Lansdale and Villanova.

Need an Experienced Lawyer to Help You With an FMLA Leave Issue?

Click Here if you have questions about any aspect of employment law, from wrongful termination, to wage and overtime claims, to discrimination and retaliation laws, to Family and Medical Leave

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