Synopsis: Holy Smokes—IL Appellate Court Rules FELA Damages for Lost Wages Are Now Taxable Income!!! Will WC Benefits/Settlements Follow?
Editor’s comment: In Munoz v. Norfolk Southern Railway Co, No. 1-17-1009, issued June 28, 2019, the Appellate Court of Illinois, First District considered a claim by a railroad freight conductor claiming negligence for injuries during his work at a RR conductor. A jury awarded him $821,000, including $310,000 for past and future lost wages. After the verdict, Norfolk moved for a setoff, claiming Munoz owed taxes on the lost wages under the Railroad Retirement Tax Act (RRTA) (I.R.C. § 3201 et seq. (2012)). The trial court denied the motion, relying on cases holding that, like personal injury judgments under section 104(a)(2) of the Internal Revenue Code the RRTA does not require employers to withhold taxes for FELA personal injury awards.
Norfolk RR appealed, arguing section 104(a)(2) only applies to nonrailroad employees' personal injury awards. Moreover, Norfolk asserted because the RRTA funds employees' retirement benefits provided by the Railroad Retirement Act of 1974, the statutes should be read together. That makes a FELA award for lost wages taxable "compensation" subject to a withholding tax. Alternatively, Norfolk contended if the IL Appellate Court found the applicable RRTA language ambiguous, we should look to Internal Revenue Service (IRS) regulations, which have interpreted "compensation" in the RRTA to include payments for lost wages.
The IL Appellate Court initially rejected Norfolk's arguments and affirmed the trial court. The Appellate Court found the RRTA defines "compensation" as money paid to an employee for "services rendered" and lost wages cannot be paid to an employee for "services rendered."
After the first decision by the IL Appellate Court, the United States Supreme Court held in BNSF Ry. Co. v. Loos, FELA lost-wages awards constitute compensation subject to withholding taxes. The Illinois Supreme Court entered a supervisory order directing us to vacate our initial judgment and consider the effect of Loos. Munoz v. Norfolk Southern Ry. Co. Based on Loos, the IL Appellate Court conclude Munoz's lost wages award was compensation taxable under the RRTA. Thus, the Court vacated their prior disposition, reversed the order of the trial court, and remanded.
Background
Plaintiff Munoz injured his shoulder and neck when a train he was working on in Norfolk's Calumet Yard came to a sudden stop. Munoz sued Norfolk for negligence under the FELA, and sought damages for lost wages, medical bills, loss of future earning capacity, and pain and suffering. Norfolk admitted liability, leaving damages as the only issue. Norfolk asserted in a trial brief any lost earnings award must be offset by Munoz's share of RRTA taxes, which, under the RRA, fund railroad employees' retirement benefits. The trial court instructed the jury, in part, "If you find for the Plaintiff, any damages you award will not be subject to income taxes and therefore you should not consider taxes in fixing the amount of the verdict." The jury returned a verdict in Munoz's favor, awarding him $821,000 in damages, including $310,000 for past and future lost wages.
Norfolk filed a posttrial motion arguing it had a $14,560.79 statutory lien on the verdict for "sickness benefits" it paid Munoz and asking for a $16,610.23 set off from Munoz's $310,000 lost wages award for his share of RRTA taxes. Munoz did not contest the lien for sickness benefits; however, as to his lost wages portion, Munoz contended lost wages should be treated no differently under the RRTA than other personal injury awards, which are not subject to income tax withholding under the Internal Revenue Code. After a hearing on the motion, the trial court followed the Missouri Supreme Court in Mickey v. BNSF Ry. Co., which held, in part, that like the exclusion for personal injury awards under Internal Revenue Code, a FELA lost wages award does not constitute income and, therefore, does not qualify as taxable "compensation" under the RRTA.
Analysis
Norfolk contends the RRTA is not ambiguous, asserting that the plain language of the statute, when read in conjunction with the RRA, supports a finding FELA lost wages award is compensation subject to withholding taxes. Alternatively, Norfolk asserted if RRTA language was ambiguous, the Appellate Court should look to IRS regulations and RRA information notices, which support withholding.
When Congress enacted the RRTA in 1937, it defined "compensation" to include lost wages. But, Congress amended the statute in 1975 and again in 1983, removing all reference to "pay for time lost." Section 3231(e)(1) of the RRTA now defines compensation as "any form of money remuneration paid to an individual for services rendered as an employee to one or more employers." Several state supreme courts held FELA lost wages awards constitute compensation subject to RRTA taxes.
In Loos, Plaintiff sued his employer, BNSF, alleging the railroad negligently caused his knee injury. The FELA claim resulted in a jury verdict in Loos's favor for pain and emotional distress, lost wages, and past medical expenses. BNSF moved to offset the lost wages award by the amount of Loos's share of taxes owed under RRTA. The trial court denied the motion, finding that no RRTA tax to be owed on the award, and the appellate court affirmed.
The Supreme Court (or SCOTUS) reversed. Our highest court noted taxes under the RRTA are measured by an employee's "compensation," which the RRTA defines as "any form of money remuneration paid to an individual for services rendered as an employee". The Court found this definition textually similar to the definition of "wages" in the Federal Insurance Contributions Act and the Social Security Act. SCOTUS found its earlier holdings were helpful in defining the term "compensation" under the RRTA. The Court noted, "wages" under the SSA and FICA included awards of backpay and severance payments, respectively, because those awards represented pay for active service as well as pay for periods of absence from active service. In line with those cases, the Court concluded "compensation" under the RRTA can encompass pay for periods of absence from active service, as long as the remuneration in question "stems from the `employer-employee relationship.”
The Court found that damages for lost wages awarded under the FELA "fit comfortably" within that definition. Like backpay, lost wages damages compensate an employee for time during which he or she is "`wrongfully separated from [work].'" Thus, just as backpay falls within the definition of wages, FELA damages for lost wages qualify as "compensation" and are taxable under the RRTA.
The Court rejected Loos's assertion that FELA damages should not be deemed "compensation" because they are "involuntary payments" that compensate an employee for an injury rather than for services rendered. The Court noted, an award of backpay compensating an employee for his wrongful discharge were "wages" under the SSA, even though it was "occasioned by `the employer's wrong.'" "Applying that reasoning," the Court stated, "there should be no dispositive difference between a payment voluntarily made and one required by law.”
The IL Appellate Court followed the ruling by SCOTUS in Loos and found the compensation was taxable income.
Summary by Gene Keefe
It is my feeling as a veteran WC defense lawyer that lots of awards in WC across our country involve wage replacement benefits. In IL, we have TTD and TPD and total and permanent disability awards. On a similar note, all death awards provide the surviving spouse and children wage replacement benefits that are missed due the passing of decedent. I ask my readers how the SCOTUS ruling in Loos wouldn’t apply to such awards in this State. I ask readers from other states how this ruling by our highest court wouldn’t apply to WC claims in other states.
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Synopsis: Great News and Less-Than-Great News from The Second City.
Editor’s comment: Let’s start with Great News!!!
For the first time ever, the City of Chicago has an actual risk manager!! Tamika Puckett, an executive from Atlanta recognized as one of the nation’s top risk managers, has been named the city of Chicago’s new Chief Risk Officer, I have learned. I am told she is a brilliant manager and is very strong on statistics and data-based handling of ERM or enterprise risk management. I wish her every good thing and stand ready to help her in any and every way. I am sure she will provide great oversight of Gallagher Bassett, the new WC adjusting company. Chicago Mayor Lori Lightfoot announced the 42-year-old former director of enterprise risk management for the City of Atlanta who was overseeing workers’ compensation and property and casualty insurance programs will head a newly created Office of Risk Management. Her first task will be to overhaul the City’s $100+ million-a-year workers’ compensation program, and stop spiraling multi-million-dollar city settlements and verdicts from police misconduct lawsuits that last year hit a record $113 million. We hope she is also going to manage the City’s Police and Fire Disability program that has been as badly run as the WC defense program.
“It is imperative for the city of Chicago to have a rigorous and robust risk management office to identify and mitigate potential threats to the economic viability of our city,” Mayor Lightfoot said in an emailed statement. “Tamika is an accomplished professional who has proven she is ready to lead this charge and create a proactive, multi-layered strategy that will protect the city of Chicago and its residents,” the mayor said of her new hire.
Now the Less-Than-Great News: Service Taxing Lawyers and Accountants—Yucch.
Mayor Lightfoot tried hard to get our new Governor and IL State Government to take over the giant gaping morass that is her inherited fake gov’t pension program and billions in debt. If you don’t know why I call it a fake gov’t pension program, send a reply and I will be happy to explain. I do not and cannot blame Mayor Lightfoot for the mess but the financial clean-up is going to be close to impossible. When Governor Pritzker put the kibosh on the Mayor’s pleas for the State to take over the City’s pension morass and allowing them to raise money by taxing the fake pensioners who are getting over $100K a year, Mayor Lightfoot is now focused on another approach that I consider grossly counter-productive. She announced she wants to raise billions by taxing legal and accounting services. Please don’t do that, Mayor!
Understanding I am a lawyer and have been one more than half of my life, I assure our brilliant Mayor she is making a giant mistake in focusing on taxing lawyers and accountants to bail out the City’s fake pension issues. I remember former Mayor Harold Washington (who spent a part of his career as an IL WC Arbitrator, if you can believe it) who imposed a “head tax” on all employees in the City. His comment was the “head tax” on each worker for a company would be a “mere drop in the bucket” for businesses. Well, rather than pay the “drop in the bucket,” thousands of companies pulled up stakes and fled from Chicago and never came back. If this new tax lands, I am certain it will happen again.
Here are some simple thoughts:
It is double taxation for a company to have to pay massive IL corporate taxes and then have to pay additional taxes for the necessary services of their lawyers and accountants when they have to be in Chicago.
It will be virtually impossible for lawyers and accountants to “pass-through” such costs to our clients—if we try to do so, national and regional clients could care less about our firms being in Chicago and will move their business to other offices/lawyers/accountants outside Chicago.
The simple reason no one is talking about service taxing the financial industry and particularly stock/bond traders is they have already quietly made it clear they will take the Chicago Stock Exchange and the Chicago Mercantile Exchange to Dallas or some other southern city the moment anything this dopey is proposed, much less enacted. The City of Dallas, Texas has already vowed to provide them anything and everything they need to move.
Plaintiff-Petitioner lawyers are all going to move their operations and staff out of the City (and maybe out of the State) very rapidly. The only reason such lawyers work in Chicago is basically tradition—Claimants are used to “coming downtown.” Such operations can rapidly be moved to neighboring cities.
Defense lawyers don’t have to work in Chicago right now—many of them already “remote in” and can continue to do so. They can move their offices and staff out of the City to handle all the “remoting” that has been going on for more than a decade. Yes, they will have to bill when they go to the Courts—we can all expect the Chicago federal, state and admin courthouses to be more digital and allow for attorneys to “virtually” try claims without having to come into the City to do so. If you aren’t aware of it, New York state is already doing this and has been doing it for some time.
Here are Gene Keefe’s Thoughts on this Financial Mess:
First and foremost, the City of Chicago is hilariously overstaffed and has redundant government, just like State government. Start by cutting costs/staff and non-essential stuff. Consider announcing what you are doing to give us all hope someone is doing something—tell all Department heads to cut budgets by 15% immediately. Next year, consider doing it again. Trust me, the City will get along fine.
Consider blending the Police Department and Fire Department into a single “Community Service” Department. Travel to Glencoe, IL and ask how they have been doing it for decades. The lines between cops, firefighters and EMTs should be eliminated. When you have a fire, the cops put on the funny red fire-hats and pick up hoses and “put the wet stuff on the red stuff.” When the fire is out, some of the cop/firefighters go back to being cops. The City of Chicago would save zillions to do this.
Please, please stop/reform the Fake Unfundable Pension issue for incoming/new workers. Bring in a 401K program! The old Fake Pension system has bankrupted the City. If you don’t do something about it for new workers, there is no hope of any future mayor ever getting back to financial normalcy.
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Synopsis: New Laws to Watch Out For In Illinois.
Editor’s comment: In the next six months, these new developments are hitting the risk and claims industry:
Recreational marijuana lands in Illinois on January 1, 2020. Please start a drug and alcohol free workplace program—if you want my draft program, send a reply. If you know someone who wants an old marijuana bust/conviction expunged from their record, send a reply.
Stalking behavior now includes sending unwanted messages via social media. The new law expands the provision of who can bring a petition under the anti-stalking law to include an authorized agent of a workplace; an authorized agent of a place of worship; and an authorized agent of a school.
Our kids are going to be in active shooter/threat school safety drills to be conducted within 90 days of the start of the school year. The new law requires the drills be conducted on days and times when students are present in the building. The law also requires participation from all school personnel and students present and for law enforcement to observe the drill.
The IL Department of Financial and Professional Regulation shall require each new applicant complete a sexual harassment training program provided by the Department and each licensee complete a sexual harassment training program provided by the Department before renewal of his or her license.
Be careful holding your cell phones while driving or even stopped at a light—you are now supposed to be ticketed if you have your phone in your hand. No warnings!
