As a result of the National Labor Relations Board’s (the “Board”) decision in Latino Express, Inc., 359 NLRB No. 44 (Dec. 18, 2012), employers will now have greater obligations in cases where individuals are awarded lump-sum backpay. Making good on its earlier promise, the Board held that employers must reimburse individuals for any additional federal or state income taxes, which may result when a lump-sum backpay award covers more than one calendar year. The Board also held that employers must submit appropriate documentation to the Social Security Administration (“SSA”) so that backpay is allocated to the appropriate calendar quarters. The Board’s decision follows, a March 2011 memorandum issued by Acting General Counsel, Lafe Solomon, in which he addressed both of these issues instructing Regions to seek a remedy with a tax component in cases involving lump-sum backpay as well as a remedy requiring employers to notify the SSA of the appropriate periods for allocating backpay.
Backpay is considered wages by the IRS and under the Social Security Act. When it is paid as a lump sum, regardless of when it was earned, it is treated as income earned in the year the award is paid and posted to the employee’s social security earnings record for that year as well. In Latino Express, the Board explained that individuals who receive a lump-sum backpay award that covers more than one calendar year, may be bumped into a higher tax bracket and therefore owe more taxes than if they had simply received those wages when they were or would be earned. Additionally, the Board provided three scenarios in which an individual’s social security benefits could be impacted by a lump-sum backpay award noting that such an award may 1) hinder the individual’s accumulation of social security credits needed to qualify for participation in old-age social security; 2) increase wages so that the individual’s income exceeds the annual contribution and benefit base for a given year; and 3) reduce monthly social security benefits for retirees.
The Board reasoned that employers should pay any additional taxes on lump-sum backpay because courts and administrative agencies frequently order such relief. To justify its requirement that employers file reports with the SSA, the Board noted that the burden on employers of filing these reports is not a heavy one and that the wrongdoer should bear the consequences of its unlawful conduct. Most importantly, however, the Board’s based its decision on the remedial policies of the National Labor Relations Act and ensuring that individuals are truly made whole and not disadvantaged a second time.
The Board’s decision will be applied retroactively and therefore impact all pending and future cases. Because numerous cases involved awards of backpay this will have a significant impact on employers who come before the Board.