Tuesday, October 7, 2014

Punch FICA in the Face? Laid-off Workers Might Be Pondering Such an Idea

After receiving one of his first paychecks in the NBA, Shaquille O’Neal famously looked at the check and remarked: “Who the hell is FICA? When I meet him, I'm going to punch him in the face.” After a recent Supreme Court decision, many laid-off workers from Quality Stores, a large retailer that went bankrupt, probably feel the same way.

These laid-off workers might look to punch FICA in the face because the Supreme Court, in United States v. Quality Stores, Inc.,  held that FICA taxes must be taken out of the severance packages they received after being laid off. FICA (which stands for “Federal Insurance Contribution Act”) is a payroll tax used to fund Social Security and Medicare. 15.3% of an employee’s gross compensation is claimed by FICA, with employees responsible for 6.2%, and employers responsible for the remaining 9.1%. FICA taxes only must be paid on wages, and only on the first $117,000 an individual earns.

Upon going bust, Quality Stores provided its employees with a severance package. Although it initially paid FICA taxes on these severance packages, it later sought a refund, arguing that the severance packages were not “wages” subject to FICA taxes. The bankruptcy court, district court, and appellate court agreed, holding that the severance packages were not “wages” subject to FICA taxes. The Supreme Court, however, did not. It noted that the statute defined “wages” as “all renumeration for employment,” and that severance packages fell into this definition. As support for this finding, it noted that the severance packages varied based on the length of time an employee had served, and were not linked to state unemployment benefits. It also noted that Congress, in 1950, had repealed an exception for wages that included “dismissal” payments.

There are a number of lessons we can take from this opinion. First, the Court noted the expansive definition the statute gives to the term “wages,” and the intent of Congress to include severance packages in this definition. This means that lump sum severance payments, like those paid by Quality Stores, probably will be subject to FICA taxes. This is particularly true if the severance packages vary for each employee based on the employee’s length of service, job performance, or any other way in which compensation is traditionally paid. These types of packages look a lot like compensation, and will probably be treated as such. Second, the opinion leaves open the possibility that if an employer structures a severance package to make it look less like compensation and more like an unemployment benefit, it might escape the broad definition of “wages” set forth in the FICA statute. An employer can do this, for instance, by granting each laid-off employee the same severance package, and providing periodic payments for as long as the employee is out of work. This looks more like a social welfare payment and may therefore not be classified as “wages.”

Ultimately, Quality Stores may have been able to prevent 15% of its severance package from being paid toward FICA taxes had it structured its package differently. As many boxers know, it often makes more sense to dodge an opponent rather than punching him in the face. Employers should heed this advice and make every effort to dodge the opponent that is FICA. Consult an attorney for more information on doing so.