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Amalgamated Transit Union Local 880 v. NJ Transit Bus Operations, Inc.

385 N.J. Super. 298, 897 A.2d 357 (App. Div. 2006)

EMPLOYER-EMPLOYEE; REINSTATEMENT; WITHHOLDING—Where employees are reinstated to their jobs in connection with the resolution of an employment dispute as if they had never been terminated, the back wages are subject to federal and state withholding taxes.

Three bus company employees were fired for improper conduct. Their union filed a grievance and demanded arbitration. The arbitrator ruled that, although the employer demonstrated a basis for disciplinary action against the employees, termination was too harsh a penalty. The arbitrator reduced the penalties to suspensions, reinstated the employees, and ordered the employer to pay back pay from the end of the suspension to the date the employees returned to work. Each of the employees returned to work with the same benefits and seniority as if he or she had never been fired. The union filed suit to confirm the arbitration awards and to direct the employer to pay the back wages. The employer sought to withhold federal and state withholding taxes from the back pay awards, contending that they constituted wages under federal and state law. The union argued that they were not wages for the purposes of withholding taxes, although it acknowledged that the awards constituted taxable income. The union relied on Sang-Hoon Kim v. Monmouth College, 320 N.J. Super. 157, 726 A.2d 1017 (Law. Div. 1998), a case involving an employee who received a damage award after being terminated based on his national origin. In that case, the employee was fired five years prior to the award. The judge in Kim held that the award did not constitute wages and was therefore not subject to withholding taxes. The judge in Kim reasoned that the Internal Revenue Code’s definition of “wages” contemplated the performance of services by the employee, and since the employee was not working at the time of the payment, the award did not constitute wages. The bus company argued that the Kim case was distinguishable, since these particular employees were reinstated to their positions. The lower court found that the back pay award was not subject to withholding and the employer appealed.

The Appellate Division reversed. While the appeal was pending, another lower court decided a case with an almost identical situation, Amalgamated Transit Union Local 880 v. DeCamp Bus Lines, 382 N.J. Super. 418, 889 A.2d 489 (Law. Div. 2005). In DeCamp, the lower court determined that back wages paid to employees who were reinstated from a suspension were subject to federal and state withholding taxes. The lower court in DeCamp rejected the Kim court’s approach which suggested, in dicta, that if the employee did not perform actual services for that period, it did not constitute wages subject to withholding taxes. It reasoned that the test is whether the employees were paid as a consequence of an existing employer-employee relationship, not whether they actually performed services for the employer for that period. In this case, the Court agreed with the DeCamp rationale, finding that the employees were reinstated to their jobs as if they were never terminated and the payments were made as a direct consequence of their employment. Therefore, the Court found that the back wages were subject to the deduction of federal and state withholding taxes.

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