Cifuentes v. Costco

When a judgment is rendered on behalf of a former employee, an employer is obligated and within their discretion to withhold payroll taxes from awards of lost wages to such former employee.

Factual Background

As a result of claims for wrongful discharge and breach of contract claims, a former employee against his employer Costco, was awarded $301, 378 in past and future wage losses, to which Defendant withheld approximately $116,150 in payroll taxes. In doing so, Defendant argued that it was required to do so pursuant to Lisec v. United Airlines, Inc., 10 Cal. App. 4th 1500 (1992). Plaintiff argued that Defendant’s tax withholding was improper where Defendant was obligated to pay the full judgement amount for its’ wrongful discharge and breach of contract claims, issued a 1099 tax form for lost wages, and allowed the employee the discretion to pay any taxes due directly to the taxing authorities. As such, Plaintiff argued that the Court could not render that such judgement or award was fully satisfied by the Defendant, rather that a deficiency existed where the actual payment was well below the purported judgement amount.

The trial court agreed with the employee, holding that the Defendant’s withholding of taxes with improper, especially where Defendant has the burden of demonstrating its satisfaction of said burden, which it failed to do by withholding such taxes and not effectuating payment of the entire judgement to employee Plaintiff. Further the trial court reasoned that where a Court award is entered, that Defendant is required as a course of law to pay the full and entire amount, which it is required to fully satisfied at the outset as opposed to seeking to satisfying taxes due, which its primary purpose or goal, but rather from an employment law perspective, to make the Plaintiff employee whole and to satisfy the full amount of the judgment herein.

The Appeals Court

The California Court of Appeals disagreed with the trial court, determining that despite the employer had withheld taxes and not made payment of the full and complete amount of the judgement, that the employer had still fulfilled its responsibility to pay such judgment and such was done with full satisfaction. Although the Court of Appeals recognized the precedent set forth in the Lisec case, that such case was not consistent with new federal court cases in the First, Fourth, Sixth, Eighth, and Ninth circuits, which had all held that any awards involving both front and back pay constitute wages subject to tax withholdings. Further, the California Court of Appeals recognized the Internal Revenue Service (IRS) guidance regarding judgment and settlement payments, where judgment and settlement payments for back and front pay are subject to tax withholding as opposed to lost wages as a result of personal injury awards.

The California Court of Appeals in its reasoning gave significant deference to the IRS guidance, reasoning that tax withholding issues are clearly in the administrative purview of the IRS and that rather than Courts making such tax withholding determinations, that it is essentially the IRS that is best positioned to do so and therefore, the Courts should in other words seeks to defer to the IRS for such tax related issues. Additionally, in clarifying its opinion, the California Court of Appeals was specific that such legal holding should be prospective, any award of front or back pay for breach of an employment contract should not be treated differently for tax purposes because it arose from a judgment rather than a settlement; and an entire award of lost wages was taxable as income regardless of whether a portion was used as to pay contingency fees.

The significance of this case is that when it comes to determining the validity of tax withholding issues, the Courts will not necessarily render tax based issues, but rather, will evaluate, assess, and incorporate where applicable, IRS guidance on such issues. As such, where employee or employer based judgments or settlements may involve tax liability and/or tax withholding issues, the Courts will look to IRS tax policy in affirming or denying the relevant tax withholding issues. This should given both employees and employers confidence in making tax withholding determinations regarding lost wage related claims, judgments, and settlements, where if conducted consistent with IRS based tax policy and regulations, the parties should be rest assured that some deference by the Courts will be given to such conduct.

Employment based claims involving a large employer requires a law firm that is experienced, competent, and knowledgeable concerning the complexities of employment based judgements, awards, and tax withholding issues. If you have any employment-related dispute and are considering suing your employer for wrongful or retaliatory discharge, contact the Orange County Employment Lawyers at Nassiri Law Group, practicing in Orange County, Riverside, and Los Angeles. Call 949.375.4734.

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