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

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.