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Severance Policy Not Applicable to Employees Who Suffered No Job Loss
By: Teresa Shulda
Some employers have written policies that provide severance pay when employees lose their jobs through actions like job eliminations or reductions in force. So what happens when employees lose their job with the original employer, pursuant to a consolidation or plant sale, but that employer makes arrangements for them to transfer to comparable jobs with the new employer with no lost work time? The Kansas Court of Appeals recently ruled that City of Topeka employees whose employment was transferred to Shawnee County did not experience a “lay-off due to work or job elimination,” and thus were not eligible for severance pay under the City’s severance pay policy.
The terms of employment for workers in Topeka’s parks and recreation department were governed by the city’s personnel code. One provision of the personnel code addressed severance pay, setting forth who is eligible for it, under what circumstances, and how much.
In 2011, the city decided to consolidate its parks and rec department with Shawnee County’s department. The city and county entered into several “consolidation contracts” that set forth the terms of the consolidation. Moreover, the city’s employees didn’t need to worry about their jobs because the city was able to negotiate an assurance with the county that all city employees who wanted to could transfer to county positions at comparable pay.
The city was able to negotiate other provisions for its employees, including:
  1. They would be able to receive severance pay if the county fired them within the first three years after      Continue Reading...
Supreme Court Confirms Severance Payments are Subject to FICA Tax
By: Jason Lacey

The Supreme Court released its decision today in the Quality Stores case, confirming that severance payments are subject to FICA taxes. 

The payments at issue in the case were fairly typical. A significant reduction-in-force occurred. The employer had two severance plans in place. Officers and managers received between 6 and 18 months of severance payments. Rank-and-file employees received one week of severance pay for each year of service. Payments were reported on W-2s, and taxes were withheld, but the employer later had a change of heart and sued the IRS for a refund of the FICA taxes. Lower courts were sympathetic to the employer's arguments, but the Supreme Court was not persuaded. The decision was unanimous, with one justice not participating.

I don't think the decision itself was a big surprise. Severance payments have generally been viewed as an extension of wage payments and, therefore, subject to the same tax treatment as wages. But if the court had reached a different conclusion, that certainly would have been big news. 

The court's opinion is here.

409A: Year-End Deadline for Correcting Certain Payments Conditioned on a Release
By: Jason Lacey

A year-end deadline for correcting certain impermissible payment language in employment, severance, or similar agreements is fast approaching.

As background, Code Section 409A - which governs most arrangements providing for future payments of taxable compensation - generally requires that deferred amounts be paid at fixed or identifiable times (e.g., termination of employment or a specified date) and that the covered individual (e.g., employee) not have the right to designate the calendar year in which payment will be made. These rules apply to most severance-pay and similar arrangements that provide for payments in the event of a specified loss of employment (e.g., a termination without cause).

It is common for severance-pay and similar arrangements to condition an employee's right to payment on the employee providing a release of claims. But this can create an issue under Section 409A, depending on how the payment language is written. The IRS takes the position that the payment language must not provide any opportunity for the employee to control or manipulate the calendar year in which payment will be made.

As an example, assume an agreement provides for a right to payment at any time within 90 days after termination of employment, once the employee has delivered a release of claims. If the employee terminates employment on November 1, the employee can effectively choose which calendar year in which to receive payment (the year of termination or the next year) by deciding when to deliver the release. In comparison, if the agreement says payment will be made on the 90th day      Continue Reading...


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Don Berner, the Labor Law, OSHA, & Immigration Law Guy
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Boyd Byers, the General Employment Law Guy
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Jason Lacey, the Employee Benefits Guy
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