Court of Appeal: OK for Employers to Withhold Taxes on Lost Wages Verdict / Settlement

When an employee wins a wrongful termination lawsuit, or settles a case, part or all of the recovery usually will be compensation for lost wages.  After a verdict, though, the court enters a judgment.  Usually interest accrues from the date of the judgment, and continues to accrue unless the judgment is "satisfied."  Additionally, employees may enforce the judgment with collection proceedings.

Employers must withhold taxes from wages, even wages recovered during a lawsuit.  If the employer does so an pays the "net" wage loss, after taxes, is that sufficient to satisfy a judgment?  For years, the answer to that question in California was "no."  At least, that's what one court of appeal had held. The employer would have to "gross up" the amount to include the witthholdings, a significant overpayment, or it would have to pay the gross sum and issue a 1099 to the employee, which could result in under-withholding penalties.

Well, another court of appeal has weighed in, and has now held that employers may satisfy a judgment by paying the net sum, after required tax withholding.

In the current case, Cifuentes recovered lost wages against Costco.  Costco withheld taxes from the recovery and sought a "satisfaction of judgment" ruling from the trial court. The court denied the motion, bound by the prior decision I mentioned, which is Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500.

Costco appealed, and the court of appeal agreed with Costco that Lisec was wrongly decided.

When Costco paid the judgment, it had two alternatives. It could follow Lisec and risk liability to the IRS and other taxing authorities for the amount of tax it failed to withhold plus penalties. Or it could follow the prevailing federal view and risk a judicial declaration that the judgment is not satisfied. We conclude it chose correctly. Costco's potential exposure for failing to withhold the payroll taxes outweighed the inconvenience to Cifuentes of seeking a refund for the excess withholding.
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The IRC requires that taxes be withheld from wages because it is the most reliable means of assuring that they are paid. (See Baral v. United States (2000) 528 U.S. 431, 436-437.) By adopting the prevailing federal view, we ensure that California employers who withhold taxes from awards of lost wages are not penalized "for fulfilling [their] legal duty." (Noel, supra, 697 F.3d at p. 212.) Moreover, our decision does not leave plaintiff employees without an adequate remedy. They may seek a refund from the taxing authorities for any amounts withheld in excess of their tax obligation. (Rivera, supra, 430 F.3d at p. 1260.) As observed in Thomas v. County of Fairfax (E.D. Va. 1991) 758 F.Supp. 353, 367, footnote 26, "[c]ourts do not disagree . . . that tax authorities must receive their due, and that neither plaintiffs nor defendants should receive windfalls." 

So, this decision creates a split in the courts of appeal, which could result in California Supreme Court review.  Or the Sixth District could re-examine Lisec.  We will have to see.

In the meantime, this is a good case for justifying withholding taxes whether after trial or as a result of settlement. 

The case is Cifuentes v. Costco Corporation and the opinion is here. 

Court of Appeal: Wages Earned at "Inferior" Job Do Not Count as "Mitigation" of Damages

Employee was a maintenance planner earning  $65,699 per year.  His employer lays him off. 

He moves to another town to be closer to his wife's job.  Employee finds new employment, but 2-3 hours from his new location.  So, he pays $500 per month for a room an hour away from the new job and he saees his family on days off. The new position is maintenance supervisor, paying $69,300 per year.  In all, employee was out of work 8 months.

Employee sues for discrimination, wrongful termination, etc.  He wins his case.  How much is the lost wages? Yes, about $44,000, which is about 8 months' salary.  I know this because that's how much the employee's lawyer asked for during closing argument.  

But the jury awarded $198,000 in lost wages, about 3 years' pay.  That happened to be equivalent to his prior annual salary from the termination date until the trial. 

The employer challenged the verdict on appeal, arguing that the jury did not take into account the employee's mitigation efforts and his actual earned wages.  

The court of appeal decided that the jury had the right to conclude that the longer commute rendered the replacement job "inferior," and that wages earned from an "inferior" job need not be counted against lost wages.

The evidence in the instant case reflects Villacorta’s job at National was located two to three hours away from the home where his family resided. As a result, Villacorta rented a room Lancaster, which was one hour away from National’s plant in Lebec. Villacorta could not find a closer rental because Lebec was “kind of a remote area.” As a result, Villacorta was only able to see his family on weekends. Villacorta’s family consisted of his wife and two daughters, who were seven and 11 years old at the time of trial. Based upon the foregoing evidence, a jury could reasonably conclude the job at National was inferior to the job at Cemex because of the burden placed on Villacorta by the location of the job. The burden included not seeing his family during workdays and having to pay for a second residence. Since the jury could reasonably conclude the National job was inferior, it was reasonable for the jury to not use Villacorta’s National wages to mitigate the Cemex losses.

This decision could lead to a lot of litigation over the quality of replacement employment.  In this case, the employee secured a new job for more money than he was earning at his old job.  Yes, it was far from his home. But he voluntarily moved his home to a remote location, making it more difficult to find replacement employment near his home.  Additionally, the court simply accepted the premise that a job that pays more, and that involves comparable work in a comparable industry still is inferior, but only because of a longer commute.  

It seems like the court is expanding plaintiffs' opportunity to recover damages for "back pay" when they did not actually suffer a financial loss. What is the role of damages for economic loss?  Is it to make a plaintiff "whole?" Or is it to provide a plaintiff with more money than he would have earned if he had stayed employed with the employer that fired him?  

This case is Villacorta v. Cemex Cement, Inc. and the opinion is here.