FMLA damages are payroll taxable, court rules

For a long time, damages employees received under the FMLA weren’t considered payroll taxable because courts read the FMLA’s unique damages provision—which mandates damages equal to lost pay—as not being the same as taxable back pay. A federal trial court has now turned this reasoning on its head and ruled that FMLA lost-pay damages are, indeed, subject to income and FICA taxes. (Cheetham v. CSX Transportation, No. 3:06-cv-704-J-PAM-TEM, D.C. Fla., 2012)

Damage assessment

A jury awarded an employee $265,655 in total damages for wrongful termination under the FMLA, $199,056 of which was attributed to lost wages. The issue was whether the employer should withhold payroll taxes from the award.

The employee said no, relying on those prior cases. The employer said yes, pointing to tax penalties for failing to withhold.

The trial court, caught between the two, did something the other courts never did: It asked the IRS to weigh in on the matter by filing a friend-of-the-court brief.

The IRS, of course, concluded that damages for lost wages were subject to withholding, and that the employer would be liable if it didn’t withhold. That was enough for the court.

Court: The FMLA’s damages provision states that an employee may receive three types of damages: lost wages or actual monetary damages, interest and liquidated damages. The most logical interpretation is that “damages equal to lost wages” acknowledges the fact that three amounts can be added together to arrive at a total award, not that damages equal to lost wages are unique and not subject to payroll taxes.

PAYROLL PRACTICE TIP: When analyzing a back pay award under any employment law, look at the allocations for back pay, compensatory damages, attorneys’ fees, etc. Next, determine whether the company is liable for the entire award or whether managers are individually liable. Amounts attributable to lost wages, which is corporate liability, are subject to withholding. Amounts attributable to managers’ liability may be taxable, but aren’t subject to withholding.