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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.
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