California’s Unemployment Insurance Fund (UIF) has been out of money for more than three years and has borrowed more than $10 million dollars from the federal government according to the Sacramento Bee. The UIF is funded by the employees’ share of payroll taxes. (The Disability Insurance Fund is funded by the employee’s payroll tax withholdings.) Prior to the EDD changes, employers who settled class actions could agree to have the claims administrator settling the case to pay all employer taxes out of the qualified settlement fund (“QSF”). The QSF was responsible for all payments and tax reporting related to the case.
The EDD has recently shifted the burden for reporting and payments for Unemployment Insurance (UI), Employment Training Tax (ETT), and Disability Insurance (DI) contributions from the QSF to the employer. The EDD has not sent out a notification or announcement of this change with instructions or an implementation plan. EDD posted this brief paragraph on their website:
If back pay (wages) is awarded in a class action settlement, who is responsible for reporting the wages and payroll taxes?
When a class action litigation involves wage and hour issues and the settlement requires back pay to be made by a third-party administrator, the employer of the workers (the defendant) is responsible for reporting subject wages and paying Unemployment Insurance, Employment Training Tax, and State Disability Insurance. The third-party administrator who controls the payment of the back pay is responsible for reporting Personal Income Tax (PIT) wages and withholding PIT from the payments.
This change is expected to increase the costs of these tax payments and thus the settlements.