• Supreme Court Takes Up Challenge to "Fair Share" Agreement to Pay Union Fees, and Taxation of Severance Benefits
  • October 31, 2013 | Author: David P. Phippen
  • Law Firm: Constangy, Brooks & Smith, LLP - Fairfax Office
  • Noel Canning did not make the Supreme Court's 2013 oral argument docket, which means it will be heard in 2014, but the Court granted certiorari this month in two other important labor and employment cases.

    On October 1, the Court agreed to hear Harris v. Quinn, a case involving an Illinois Executive Order and an agreement by the state with the Service Employees International Union to require employees to pay "fair share" fees to the SEIU to cover collective bargaining and grievance administration costs. The plaintiffs are two non-union home healthcare workers acting as personal care aides to recipients of federal Medicaid benefits that are paid through the state. The plaintiffs allege that the "fair share" agreements violate their right of free speech by forcing them, through government action, to accept the union as their representative and to support the union with the state-required fees. Both a federal district court in Illinois and the U.S. Court of Appeals for the Seventh Circuit rejected the claims, with the Seventh Circuit holding that the state could compel them, as state employees, to financially support the union as an exclusive collective bargaining representative. The employees contend that payment from Medicaid funds through the state is not enough to make them "state employees" and force them to support the union. They assert that the case squarely presents the issue of whether compulsory union representation can be extended beyond public employees to employees who are merely paid by public aid programs. The National Right to Work Legal Defense Foundation represents the employees and put forward a strong case in having certiorari granted.

    Certiorari was also granted in In re Quality Stores, Inc., where the issue is whether severance payments to employees as part of an involuntary reduction-in-force benefit plan are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act. The case arose out of a bankruptcy of a Michigan-based company. The company paid severance benefits to terminated employees under two plans, and withheld FICA taxes under protest. Subsequently, the company and its affiliated companies, and some of the employees, brought an adversary bankruptcy action seeking a refund of $1,000,125 in FICA taxes, asserting that the severance payments were not "wages" subject to FICA withholding but were "supplemental unemployment compensation benefits," also known as "SUB payments." The bankruptcy court, a federal judge in the Western District of Michigan, and the U.S. Court of Appeals for the Sixth Circuit all agreed that the payments were SUB payments rather than wages, and were not subject to FICA taxes. In doing so, the Sixth Circuit reached a conclusion at odds with a 2008 decision of U.S. Court of Appeals for the Federal Circuit.

    For many years, the position of the Internal Revenue Service has been that severance pay benefits of any sort are taxable as amounts paid in lieu of wages. The IRS makes an exception for a narrow class of certain supplemental unemployment benefits that are (1) tied to receipt of state unemployment compensation and (2) paid periodically over time. Employers who have had or are contemplating reductions in force with severance benefits should monitor the Quality Stores case and, even now, prepare to file a refund claim for FICA taxes paid in connection with a reduction in force, depending on what the Supreme Court decides. Such refund claims generally must be filed within three years after the April 15 deadline for the tax year for which the refund is claimed.