NLRB: Employers Responsible for Extra Taxes on Employees' Back-Pay Awards

07 January 2013 Labor & Employment Law Perspectives Blog

Employers should take note of the NLRB’s most recent decision that imposes additional burdens on employers where back wages are ordered in unfair labor practice cases. On December 20, 2012, the NLRB released its decision in Latino Express, Inc., which ordered the employer to compensate employees for any additional federal and state income taxes incurred as a result of receiving a lump-sum back-pay award covering periods longer than one year. In its ruling, the NLRB explained that the new tax compensation remedy was necessary because an employee receiving back wages covering more than a single calendar year may incur a greater tax liability if the employee is pushed into a higher tax bracket as a result of a lump-sum payment since the “IRS considers a backpay award to be income earned in the year the award is paid, regardless of when the income should have been received.” The NLRB found that compensating employees for any adverse tax consequences was in line with its remedial objective to “make whole” employees who would not have incurred any additional taxes but for the unfair labor practice. This ruling also requires that employers ordered to pay back pay must file a report with the Social Security Administration (SSA) allocating the back wages to the appropriate calendar quarters in which they were or would have been earned. Under long-standing NLRB policies, back pay is computed on a quarterly basis even though it may be paid to an employee in a lump sum. Back wages are subject to Social Security withholding tax requirements and are posted to the employee’s Social Security earnings record in the year it is received unless the SSA is otherwise notified. In its new ruling, the NLRB explained that failing to properly credit back pay to the quarters covered by a lump-sum payment harmed an employee by not appropriately distributing Social Security credits for old-age benefits or may otherwise disadvantage the employee in other scenarios. Although the employee has the ability to report receipt of a back-pay award to the SSA, the NLRB ordered the employer to file the report based upon “the principle that the wrongdoer, rather than the victim of wrongdoing, should bear the consequences of its unlawful conduct.”

This ruling arises out of its decision in July that Latino Express, a bus company, owed back wages to two workers who claimed that they were terminated for their involvement in a union organizing campaign. This decision also follows guidelines issued by the NLRB Acting General Counsel in March 2011 which outlined new methods for calculating back pay, including daily compounded interest and tax penalties for lump-sum payments as part of an initiative to ensure that unfair labor practices “are more fairly and effectively remedied.”

It should be noted that both changes will be applied retroactively. This means that the decision will be applied to any cases currently pending before the Board as well as any future remedial orders issued by the Board.

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.

Related Services