Quality Stores laid off many employees as part of a bankruptcy. The Company paid severance, duly withheld taxes, and duly reported the severance on employees' W-2 forms. Then the Company sought a refund of the "FICA" taxes paid on behalf of employees (and presumably the employer's portion of the FICA paid as well).
Everyone with a paycheck knows that FICA is a mandatory withholding from employees' paychecks, which goes towards funding social security. "FICA" is the Federal Insurance Contributions Act. As explained by the Court:
FICA taxes “wages” paid by an employer or received by an employee “with respect to employment.” 26 U. S. C. §§3101(a), (b), 3111(a), (b) . . . . FICA defines “wages” as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.” §3121(a). The term “employment” encompasses “any service, of whatever nature, performed . . . by an employee for the person employing him.” §3121(b).
So, that's a broad definition. Does it include severance payments to laid off employees? Yes, said the Court. (Unanimous opinion, except Justice Kagan was recused):
Under this definition, and as a matter of plain meaning, severance payments made to terminated employees are“remuneration for employment.” Severance payments are,of course, “remuneration,” and common sense dictates that employees receive the payments “for employment.” Severance payments are made to employees only. It would be contrary to common usage to describe as a severancepayment remuneration provided to someone who has not worked for the employer. Severance payments are made in consideration for employment—for a “service . . . performed” by “an employee for the person employing him,”per FICA’s definition of the term “employment.” Ibid.
(emphasis mine).
Caveat for California employers:
Some severance plans are covered by ERISA. If so, then federal law governs the payment of severance, the timing, and the conditions. However, the Division of Labor Standards Enforcement may decide that a severance claim is not subject to ERISA. The DLSE will consider whether there is a plan in place, the discretion involved in calculating the eligibility and formula for payment, and other factors.
If ERISA does not apply, California law may consider severance to be in the form of a deferred payment of wages. Wages must be paid timely under California law.
Employers should therefore ensure that they pay severance when it is earned in accordance with the contract (severance agreement or plan). For example, if ERISA does not apply, a promise to pay a lump sum severance, without any conditions such as the signing of a release, may require payment on the date of termination.
On the other hand, if the employer requires the employee to sign a release to "earn" the severance, then the severance is not due until earned. (That is another good reason to require signing a release before severance is earned.)
This case is U.S. v. Quality Stores, Inc. and the opinion is here.
