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José J. Santiago

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US SUPREME COURT DECIDES SEVERANCE PAYMENTS ARE WAGES AND EMPLOYERS MUST DEDUCT FICA TAXES

 

The US Supreme Court issued a unanimous (8-0, Justice Kagan did not take part) decision on the case of U.S. v. Quality Stores, Inc., et al.(March 25, 2014) holding that lump sum severance payments are wages for Federal Insurance Contributions Act (FICA) purposes. FICA is a federal payroll tax used to fund Social Security and Medicare. The Supreme Court confirmed the long-time interpretation of the Internal Revenue Service.


Quality Stores, Inc., made severance payments to employees who were involuntarily terminated as part of its Chapter 11 bankruptcy. The severance payments varied depending on the employees' title and job seniority. Quality Stores paid and withheld the required Social Security insurance taxes under FICA. The Company later sought a refund on behalf of itself and about 1,850 former employees. The IRS neither denied nor allowed the claim. Quality Stores then initiated proceedings in the Bankruptcy Court, which granted summary judgment in its favor. The District Court and Sixth Circuit affirmed, concluding that severance payments are not wages under FICA.


We must remember that the Puerto Rico Supreme Court held in the case of Alvira v. SKF, 142 D.P.R. 803 (1997), that severance payments under Puerto Rico Act No. 80 of May 30, 1976 (Unjust Dismissal Act) are exempt from any payroll deductions, including FICA deductions. However, the new Quality Stores, supra, decision makes clear that lump sum severance payments for involuntary terminations are taxable under FICA and therefore, FICA taxes must be deducted.

 

US SUPREME COURT EXTENDS SARBANES-OXLEY PROTECTION TO EMPLOYEES OF CONTRACTORS AND SUPCONTRACTORS OF PUBLIC COMPANIES

In Lawson v. FMR LLC, (March 4, 2014), the Supreme Court greatly expanded the scope of SOX's whistleblower protections.


The plaintiffs in this case were former employees of private companies that contract to advise or manage mutual funds. The mutual funds served by the contractors are public companies with no employees. The plaintiffs alleged that they blew the whistle on putative fraud relating to the mutual funds and, as a consequence, suffered retaliation by their employers. The defendant companies sought to have the employees' lawsuits dismissed, arguing that as employees of privately held companies, the plaintiffs were not covered by the Sarbanes-Oxley whistleblower provision.


The Court focused on the legislative intent to combat fraud in public companies stating that the Act's purpose was to "safeguard investors in public companies and restore trust in the financial markets following the collapse of the Enron Corporation."


Private employers that perform services for public companies should be aware that they may be subject to retaliation claims from their own employees who report allegations of fraud at the public companies they serve.

 

The Labor Law Group at Fiddler González & Rodríguez, P.S.C., will issue the FGR LABOR WATCH with information of legal issues and developments in areas of interest to our friends and clients. If you know anyone who would like to receive the FGR LABOR WATCH, please feel free to forward this newsletter. For more information about any matter raised in this Labor Watch, please contact your usual FGR labor lawyer or José A. Silva Cofresí at jsilva@fgrlaw.com.

©2014 FIDDLER GONZÁLEZ & RODRÍGUEZ, P.S.C. Permission is granted to view, store, print, copy or distribute the content of this newsletter for noncommercial or personal use, provided you do not alter it and you give us proper credit. The content of this newsletter is for informational purposes only. It is not legal advice or advertising. In addition, the above discussion has been provided in general terms and, therefore, should not be relied upon as legal advice applicable to a specific set of facts and circumstances. Before taking legal action, consult a lawyer you trust. Although we will try to be accurate, you cannot rely on its applicability to your specific problem without consulting your lawyer. Fiddler González & Rodríguez, P.S.C. and the members of the Labor Law Group assume no responsibility to inform you of additional changes in law or any other legal issues related to matters addressed in this email of which we may become aware after the date hereof. This newsletter is not intended to create an attorney-client relationship between you and our firm or any of our attorneys. If we are not already representing you, be mindful that your email communications to any of our lawyers will not be treated as privileged or confidential until you ask us to represent you, we first conduct a conflict of interest search, we agree to represent you and you sign an engagement letter from the law firm.

***IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any United States federal tax advice in this communication (including any attachments) is not intended or written by Fiddler González & Rodríguez, P.S.C. to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. **

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