Internal Revenue Service severance pay advisory update

Internal Revenue Service severance pay advisory update

Source: Office of Federal, State and Local Governments

In its July 2013 newsletter,*the Internal Revenue Service’s Office of Federal, State and Local Governments [FSLG] addressed the tax treatment of severance payments made by government entities to terminated employees by the Internal Revenue Service [IRS]. The article, Severance pay and FICA, noted that under Internal Revenue Code §61 severance pay is included [1] in the gross income of the recipient and normal income tax withholding rules apply and [2] severance pay is generally wages for purposes of FICA taxes.

In its decision in United States v. Quality Stores, 134 S.Ct. 1395 [2014], the United States Supreme Court held that severance payments made to involuntarily terminated employees were wages subject to Social Security and Medicare (FICA) taxes. Accordingly, IRS advises it will disallow all claims for refunds of FICA taxes on severance pay.

However, IRS Revenue Ruling 90-72 provides a limited administrative exception for certain payments that supplement state unemployment compensation, sometimes referred to as “SUB-pay.” The Ruling provides for an exception for a stream of payments coordinated with the receipt of unemployment compensation and specifically points out that a lump-sum payment would not qualify for the exception. IRS said that as the Supreme Court decision did not address the provisions of Revenue Ruling 90-72, payments that meeting Ruling 90-72 requirements stated in that ruling continue to be excluded from wages for FICA purposes.

Questions about severance pay should be directed to one of the following Federal, State and Local Government [FSLG] Specialists for New York State: Dave Coulon [(315) 233-7305]; Jean Redman [(607-378-0069] or Granville Shannon [(212) 436 -1492].

* The July 2013 is posted on the Internet at: http://www.irs.gov/pub/irs-tege/p4090_0713.pdf. The FSLG Newsletter is asemiannual newsletter published by the Internal Revenue Service’s office of Federal, State and Local Governments (FSLG) to assist in FSLG’s mission to ensure compliance by Federal, state, and local governmental entities with Federal employment and other tax laws through educational and compliance review activities.

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Suspension without pay

Suspension without pay
2014 NY Slip Op 04860, Appellate Division, First Department

The employee [Plaintiff] was suspended without pay indefinitely pursuant to Article III(9) of the collective bargaining agreement (CBA) based on his failure to provide a proper accounting of funds allocated to him in connection with his employment. He remained suspended without pay until he retired on November 30, 2004. 

The disciplinary arbitration panel found that Plaintiff had been improperly suspended without pay for more than 30 days, in violation of the CBA, and awarded him wages and benefit contributions for the period from 30 days after his suspension through the date of the first arbitration hearing, which was held September 29, 2005. The employer filed a CPLR Article 75 petition challenging the arbitration award.

Noting that Civil Service Law §75(3) was incorporated into the CBA under Article XVII(4)(B), the Appellate Division agreed with the employer that since the CBA and Civil Service Law §75(3) both permit back-pay awards only for periods of improper suspension, even if the grievant was suspended improperly and held that the arbitrators exceeded their power by awarding Plaintiff back pay for a period of time following his voluntary retirement.

Accordingly, the Appellate Division unanimously modified the arbitration award, on the law, to define the period for the purposes of awarding Plaintiff back pay and benefits ran from 30 days after Plaintiff’s suspension without pay through the date of the Plaintiff's retirement rather than for period running from 30 days after his suspension without pay through the date of the first arbitration hearing,

In effect the court ruled that an individual improperly suspended without pay was entitled to back pay for any suspension without pay in excess of the 30-day period authorized by §75(3) only through the effective date of his or her separation from service such as the result of his or her retirement, resignation or death. Presumably the same limitation would apply in situations where the individual services would otherwise terminate by operation of law, rule or regulation while he or she was improperly suspended without pay.

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Attaining tenure by estoppel or acquisition

Attaining tenure by estoppel or acquisition

Files v Department of Educ. of the City of New York, 2014 NY Slip Op 04713, Appellate Division, First Department

Typically a probationary teacher or administrator will attain tenure by estoppel or acquisition when a school board accepts the continued services of the teacher or administrator, but fails to take the action required by law to either grant or deny tenure prior to the expiration of the teacher’s or administrator’s probationary term.

The Appellate Division sustained a State Supreme Court decision rejecting a probationary teacher’s [Teacher] petition by which she sought a court order annulling her employer’s decision to deny her tenure and to terminate her employment, contending that she had attained tenure by estoppel.

As to Teacher’s claim that she had attained tenure by estoppel, the Appellate Division said the she had failed to demonstrate that she acquired tenure by estoppel or acquisition as the record demonstrated that she did not perform the duties of a teacher beyond her probationary term. The decision notes that Teacher’s employer made it clear to her that she would not be given tenure and, at most, would be offered an extension of her probationary period. Teacher, however, declined the offer to extend her probationary period.

Significantly Teacher was not placed in a classroom nor did she perform any traditional teaching functions immediately prior to the expiration of her probationary period. Rather, said the Appellate Division, the record demonstrates that she performed administrative tasks instead of traditional teaching duties.

The Appellate Division also rejected Teacher’s allegation that her employer had “engaged in bad faith when it terminated her employment” as the record indicated that Teacher had received “two letters of misconduct and an unsatisfactory performance rating.”

One exception to the general rule: In Mendez v Valenti, 101 AD2d 612 the Appellate Division held that as long as the termination of a probationer appointed to a position in the classified service is effected within a reasonable time after the end of his or her maximum period of probation, such as set to coincide with the end of the next payroll period, he or she does not attain tenure by estoppel or acquisition notwithstanding his or her continuation on the payroll. 

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Arbitrator’s imposing a penalty of suspension without pay rather than termination did not violate public policy

Arbitrator’s imposing a penalty of suspension without pay rather than termination did not violate public policy

Roberts v City of New York, 2014 NY Slip Op 04706, Appellate Division, First Department

A twenty-two year employee was involved in a traffic accident while driving a Department vehicle under the influence of alcohol. After a hearing at which both sides presented testimony and documentary evidence, an arbitrator rejected the Department’s preferred penalty of termination, ruling instead that the unpaid suspension, which had lasted nearly two years, imposed on the employee immediately after the accident was a sufficient penalty for an employee who had an otherwise unblemished employment history and who had admitted his addiction to alcohol and had taken full responsibility for his misconduct.

The arbitrator, considering the employee's remorse and completion of his rehabilitation programs, ordered him reinstated as a Department employee to “a position commensurate with his experience,” but ruled that the Department did not have to restore him to a position requiring that he drive department vehicles until it was confident that he had been rehabilitated.

The Department then filed a petition pursuant to Article 75 of the CPLR seeking to vacate the arbitration award, contending that that termination was the only appropriate penalty under the circumstances. Supreme Court dismissed the Department’s petition and the Appellate Division affirmed the lower court’s ruling.

The Appellate Division, considering the record and the findings made by the arbitrator, ruled that the Department had not established that the arbitration award should be vacated, explaining that the arbitrator’s award did not violate public policy and the Department failed to cite to any well-defined constitutional, statutory or common law principle that the award violated.

In the words of the Appellate Division, “as the arbitrator grounded his reasoning in the evidence, including an assessment of the employee as frank and apologetic,” the Department’s contention that termination is the only appropriate penalty “is without merit,” citing United Federation of Teachers, Local 2 v Board of Education, 1 NY3d 72.

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Determining the existence of an employer-employee relationship for the purposes of eligibility of Unemployment Insurance benefits and the payment of required employer contributions

Determining the existence of an employer-employee relationship for the purposes of eligibility of Unemployment Insurance benefits and the payment of required employer contributions

2014 NY Slip Op 04544, Appellate Division, Third Department

The school district [District] challenged two decisions issued by the Unemployment Insurance Appeals Board holding that::

1. The District was the employer of a claimant for Unemployment Insurance benefits; and

2. The District was required to pay additional unemployment insurance contributions based on remuneration paid to the claimant and other individuals similarly situated.

The Appellate Division affirmed the Board’s determination, explaining that “Whether there exists an employee-employer relationship is a factual question to be resolved by the Board and we will not disturb its determination when it is supported by substantial evidence in the record.”

The court pointed out that the Board’s determination regarding an employer-employee relationship “rests not on one single factor, but consideration is given to whether control was exercised over the results or the means used to achieve those results, with the latter factor deemed more important.”

In this instance the claimant testified that, among other things, she was provided with a school district computer for use in coordinating the District's program, maintained a file cabinet and mailbox at the school, was given use of the photocopier and postage machine, and had access to school district transportation. Claimant also testified that she performed most of her work at the school, including some tasks that were required to be performed there.

Claimant further testified the District’s Superintendent had disapproved classes, directed claimant to hire a specific teacher against her wishes, had final approval over her canceling classes; and that claimant was required to seek approval before assigning herself to teach a class and that request had been denied.

In addition, both the claimant and the Superintendent testified that, in addition to claimant’s duties supervising the school district’s adult education program, she also provided office help and performed general records management duties for the school district.

The Appellate Division ruled that that notwithstanding evidence that might support a different conclusion, it found that substantial evidence supported the Board's decision. Accordingly the Board’s rulings were affirmed, requiring the school district to make the appropriate additional Unemployment Insurance contributions based on remuneration paid to the claimant and the remuneration it had paid to others similarly situated and, in addition, sustained the Board’s order requiring payments of Unemployment Insurance benefits to the claimant.

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