Top Wage and Hour Developments U.S. Employers Need to Know

Supreme Court Resolves FICA Tax Treatment of Severance in Quality Stores Decision

Many U.S. employers have been following the Quality Stores case since 2012 when the Sixth Circuit held that FICA taxes did not apply to most severance payments.  In the two years that have passed, many U.S. employers who had severance events filed FICA refund claims on the basis of the Sixth Circuit’s decision in Quality Stores.  On March 25, 2014, just weeks before another round of FICA refund claims was due to be filed, the Supreme Court issued its opinion holding that FICA taxes apply to severance payments.

Background

Generally, wages are subject to Social Security and Medicare taxes under the Federal Insurance Contribution Act (“FICA”).  The issue inQuality Stores was whether certain types of severance payments constitute wages subject to FICA taxation.  To make this determination, the Sixth Circuit looked to Internal Revenue Code (“Code”) Section 3402(o) which defines supplemental unemployment benefits payments (“SUB pay”) for income tax withholding purposes.  Under this section, SUB pay subject to federal income tax withholding are amounts paid to an employee pursuant to a plan because of involuntary separation from employment resulting from a reduction in force, plant closing, or other similar condition.  Section 3402(o)(1) provides that SUB pay “shall be treated as if it were a payment of wages by an employer to an employee for the payroll period.”  (Emphasis added).  The Sixth Circuit inferred from this language that Congress did not consider SUB pay to be wages, but provided for federal income tax withholding on SUB pay notwithstanding its non-wage status.  Thus, the Sixth Circuit concluded that since SUB pay was not wages for federal income tax withholding purposes, it should not be treated as wages for FICA tax purposes.

Split of Authority

The Sixth Circuit’s decision directly conflicted with the Federal Circuit’s 2008 ruling in CSX Corp. v. United States, 518 F.3d 1328 (2008), which held that similar types of severance payments were subject to FICA taxes.  The Federal Circuit in CSX did not look to the language in section 3402(o).  Instead, the CSX court relied on the treatment of dismissal payments as wages for FICA purposes, both by Congress when it did away with the FICA exemption for dismissal payments in 1950 (and for stand-by payments in 1983), and by the case law such as Associated Electric Cooperative, Inc. v. U.S., 226 F.3d 1322 (Fed. Cir. 2000).

U.S. Supreme Court Resolves Conflict

In a unanimous opinion, the Supreme Court in United States v. Quality Stores, 572 U.S. __, 134 S. Ct. 1395 (2014), concluded that severance is covered by the Code’s broad definition of wages subject to FICA taxes.  The Supreme Court pointed out that FICA defines wages as “all remuneration for employment” and employment is defined as “any service, of whatever nature, performed by an employee for the person employing him.”  The severance in the case was paid only to employees and the amount paid depended on the employee’s seniority and length of service.  Thus, it was a form of remuneration for employment subject to FICA taxation.  Additionally, the Court pointed out that there had previously been an exemption from FICA for dismissal pay, but Congress repealed that exemption.  Additionally, the Court was not persuaded that Code Section 3402(o) had any implication for the FICA taxation of severance.

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Required Pre-Shift and Closing Activities

Several cases this quarter addressed the wage and hour risks of requiring employees to attend pre-shift or post-shift meetings, off the clock.

  • On March 12, 2014, in Clark v. Bally’s Park Place, Inc., the plaintiff alleges that the casino required him and other dealers to attend five to ten minute “Buzz Sessions” before starting their shifts and that they were not allowed to clock in before these meetings.  According to the plaintiff, this resulted in a significant amount of time worked without compensation, some of which would have qualified as overtime if his hours were properly recorded.  Rejecting arguments that a lack of attendance sheets or determining which employees thought the meetings were mandatory made the class unascertainable, the New Jersey federal district court certified the class of table games dealers to determine the amount of overtime due.
  • On March 7, 2014, in Troester v. Starbucks Corp. (C.D. Cal. Mar. 17, 2014), a California employee sought unpaid wages and overtime for alleged after-shift activities.  The employee alleged that he spent one or two minutes per day after clocking out setting the store’s alarm, locking the store, and walking employees to their cars, as required by Starbucks.  On rare occasions the employee spent additional time bringing in patio furniture or waiting for another employee’s ride to arrive.  Granting Starbucks’ motion for summary judgment, the California federal district court applied the “de minimis doctrine,” finding the amount of time at issue was unsubstantial and the administrative difficulties of capturing the unrecorded time were such that recording it was not feasible.  As a result, the district court held the time was not compensable.

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State News

New York City Adopts Paid Sick Leave Law

On April 1, 2014, the New York City Earned Sick Time Act (the “Act”) became effective.  In doing so, New York City joined Connecticut, the District of Columbia, Newark, Jersey City, San Francisco, Seattle and Portland, each of which also requires employers to allow employees to accrue and use paid sick leave.  Click here to read more.

California Supreme Court Upholds Class Action Waiver in Employee Arbitration Agreement for Some, But Not All, Wage Claims

Reversing years of precedent, on June 23, 2014, in Iskanian v. CLS Transportation Los Angeles, LLC, the California Supreme Court joined the majority of courts and held employment arbitration agreements containing class action waivers are enforceable as a general rule, relying on the recent U.S. Supreme Court decisions in this area.  In this case, the Plaintiff-driver brought a class and representative action in 2006 on behalf of himself and other drivers, alleging a litany of wage and hour violations including failure to pay proper overtime, failure to provide meal and rest breaks, failure to provide accurate wage statements, and seeking penalties under California’s Private Attorneys’ General Act (PAGA) for these violations.

Although CLS initially lost a motion to compel arbitration, it renewed its motion following the US Supreme Court’s decision in AT&T Mobility LLC v. Conception, 563 U.S. ___, 131 S. Ct. 1740 (2011), in which the Supreme Court upheld such arbitration agreements and class action waivers under the Federal Arbitration Act (FAA). In its holding, the Conception Court held the FAA does not allow states to mandate or promote procedures that are incompatible with arbitration.  The California Supreme Court found that Conception abrogated its earlier decisions to the contrary with respect to the class claims.

The California Supreme Court also held, however, that employees cannot be forced to waive their right to bring a civil lawsuit under PAGA.  Under PAGA, an employee can bring a representative action on behalf of the State for labor violations committed by the employer, and seek penalties for all aggrieved employees.  The California Supreme Court opined: “[A]n arbitration agreement requiring an employee as a condition of employment to give up the right to bring representative PAGA actions in any forum is contrary to public policy.  In addition, we conclude that the FAA’s goal of promoting arbitration as a means of private dispute resolution does not preclude our Legislature from deputizing employees to prosecute Labor Code violations on the state’s behalf.  Therefore, the FAA does not preempt a state law that prohibits waiver of PAGA representative actions in an employment contract.”

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California Court Holds Actual, Not Intended, Duties Determine Exemption

In Madden V. Lumber One Home Ctr., Inc., a California appellate court held that two managers were not properly exempt due to their limited involvement in hiring and firing  during the economic slump when the Company was not engaged in hiring and firing.  Lumber One classified three managers, who performed similar tasks, as exempt under the executive exemption to the FLSA.  Because it was a smaller enterprise, it was the company’s general practice to ask all employees for their input on whether they knew the candidates or if they could provide specific information on a candidate, but it did not involve them in interviews, reviewing resumes, ranking applicants, making hiring recommendations outside of informal reference checks, or anything else related to its hiring process.  Two of the managers only provided such informal input as was solicited from all employees, but a third manager specifically recommended two truck drivers for hire.  The Court found that involvement in at least one personnel decision was sufficient evidence for a jury to conclude the third manager was exempt; however, the Court held that the first two managers were non-exempt as "informal input, solicited from all employees" is not sufficient to meet the hire/fire prong of the executive exemption.  While the Company attempted to argue that the managers were simply unable to participate in personnel decisions because of the size of the company and that no hiring decisions were being made at the time, the Court stated that it takes into account the size of the company when evaluating the frequency of the participation by the manager, but that the FLSA's exemptions must be based on "actual job functions" and "not intended responsibilities.”

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