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MCKAY v. HORN

December 10, 1981

Loretta McKAY, Milton Farrior, George McNally, Madeline Rainor, Gerald Capasso, Anne M. Laskin, and the New Jersey Federation of Senior Citizens, Plaintiffs,
v.
John S. HORN, Commissioner of the New Jersey Department of Labor and Industry; Roscoe Egger, Commissioner of the Internal Revenue Service; Raymond Donovan, Secretary of Labor, individually and in their official capacities, Defendants



The opinion of the court was delivered by: DEBEVOISE

Plaintiffs challenge the constitutionality of recently enacted amendments to the Federal Unemployment Tax Act, 26 U.S.C. § 3301 et seq., and the New Jersey Unemployment Compensation Law, N.J.S.A. 43:21-1 et seq., the effect of which is to reduce the unemployment insurance benefits payable to individuals who simultaneously receive pension benefits, Social Security retirement benefits or other periodic payments attributable to previous work history. The matter is before the court on defendants' motion to dismiss. *fn1"

Plaintiffs, individuals whose unemployment benefits have been curtailed or eliminated by the amendments in question, bring this suit on behalf of themselves and all others similarly situated against John S. Horn, Commissioner of the New Jersey Department of Labor, Jerome Kurtz, Commissioner of the Internal Revenue Service and Ray Marshall, Secretary of Labor. *fn2" It is their contention that the federal amendment, 26 U.S.C. § 3304(a)(15), denies them equal protection of the laws and impairs the obligation of contracts in violation of the Fifth Amendment. They claim that the parallel state amendment, N.J.S.A. 43:21-5(a), denies them equal protection and due process of law, in violation of the Fourteenth Amendment, and impairs the obligation of contracts, in violation of Article 1, section 10 of the Constitution. Invoking pendent jurisdiction, plaintiffs further contend that N.J.S.A. 43:21-5a denies them equal protection and due process of law, in violation of Article 1, paragraph 1 of the New Jersey Constitution; impairs the obligation of contracts, in violation of Article 4, section 7, paragraph 3 of the New Jersey Constitution; and impermissibly discriminates on the basis of age, in violation of New Jersey's Law Against Discrimination, N.J.S.A. 10:5-1 et seq. Plaintiffs seek the following remedies: a declaratory judgment that the federal and state amendments are unconstitutional and invalid; a preliminary and permanent injunction restraining defendants from effecting the unemployment insurance reductions prescribed by the amendments; and a retroactive award of benefits heretofore denied.

 Both the state and federal defendants join in a motion to dismiss for failure to state a claim. The federal defendants assert, as grounds for their motion, that: (1) plaintiffs lack standing to challenge the validity of the federal statute; (2) the action is barred in its entirety by the Tax Injunction Act, 28 U.S.C. § 1341; and (3) the legislation at issue violates neither the equal protection, due process nor contracts clauses of the Constitution. The state defendants join grounds (2) and (3) in support of their motion, but demur from the federal defendants' contention that plaintiffs lack standing to challenge the federal amendment.

 A. The Federal-State "Cooperative" Unemployment Compensation Scheme

 The history and operation of the nation's federal-state cooperative unemployment compensation scheme, first enacted as Title IX of the Social Security Act of 1935 and now codified as the Federal Unemployment Tax Act (FUTA), 26 U.S.C. § 3301 et seq., have been described in detail on many occasions, see, e.g., Carmichael v. Southern Coal Co., 301 U.S. 495, 57 S. Ct. 868, 81 L. Ed. 1245 (1937); Steward Machine Co. v. Davis, 301 U.S. 548, 57 S. Ct. 883, 81 L. Ed. 1279 (1937); State of New Hampshire Department of Employment Security v. Marshall, 616 F.2d 240 (1st Cir. 1980), and need not be re-examined at length.

 For purposes of this case, it will suffice to observe that Congress created in 1935, through its taxing and spending powers, a comprehensive and uniform system of unemployment compensation. *fn3" The states had previously been reluctant to undertake such measures unilaterally, fearing that employers would flee to jurisdictions which did not impose similar taxes. Steward Machine Co. v. Davis, supra 301 U.S. at 587-88, 57 S. Ct. at 891. Key to the Congressional program, therefore, was full participation by and uniformity among the states.

 Although the New Deal legislation has since been revised and recodified many times, its fundamental principles have not been substantially altered. The desired uniformity is now achieved in the following fashion.

 FUTA imposes a substantial federal excise tax upon the payrolls of private employers. The employer, however, is entitled to credit against the payroll tax up to 90% of any contributions made during the fiscal year to a certified state unemployment compensation fund. The state remits such contributions to the Secretary of the Treasury for inclusion in a federal Unemployment Trust Fund. When the need arises, the Secretary authorizes release of the Trust Fund monies to the state for payment of unemployment compensation benefits.

 In addition to receiving and disbursing monies for the payment of unemployment benefits, the Secretary of the Treasury is authorized to make payments to the states from both FUTA and general tax revenues to aid in the administration of certified state unemployment compensation programs. 42 U.S.C. §§ 501-504 and 1101(c)(1)(A). Also available to states with certified unemployment programs are federal funds for the maintenance of public employment offices providing job placement, recruitment and other services to unemployed workers. 29 U.S.C. § 49 et seq. As unemployment has increased in recent years, Congress has expanded the federal government's commitment to states participating in the cooperative scheme by authorizing appropriations from general revenues for extended and supplemental unemployment benefits and for interest-free loans to state unemployment accounts. 26 U.S.C. § 3304 note.

 If a state is to receive the benefits of FUTA's federal-state cooperative scheme, it must abide by federal rules. Congress has set forth in 26 U.S.C. § 3304(a) minimum federal criteria governing the conditions of eligibility and the manner in which state unemployment benefits are to be paid. *fn4" Unless the Secretary of Labor has certified the state's unemployment program to be in substantial compliance with the provisions of § 3304(a) in a given taxable year, private employers are ineligible for any credits against the FUTA payroll tax on account of contributions made to the state's unemployment fund. Furthermore, the state itself is disqualified from receiving federal funds directed to the administration of its unemployment laws, maintenance of public employment offices, provision of supplemental and extended benefits and subsidization of its compensation fund. Whether a state does or does not qualify to receive the benefits of the FUTA program, its employers must still pay FUTA's payroll tax.

 The federal defendants insistently urge that the states' participation in the federal-state cooperative unemployment compensation scheme is purely voluntary because each state remains free at any time to enact non-conforming legislation and withdraw from the program. See State of New Hampshire Department of Employment Security v. Marshall, supra. This is undeniably true. The economic consequences of nonconformity to a state, its employers and its employees, however, are severe. The practical effect of the federal unemployment legislation, therefore, has been to create a substantially uniform program throughout the nation, ruled by the guiding hand of Congress. *fn5"

 The State of New Jersey passed a statute conforming with the federal unemployment compensation law in 1936, see N.J.S.A. 43:21-1 et seq., and has been a full participant in the cooperative program since that time.

 B. The Challenged Amendments

 Plaintiffs in the present action challenge the constitutionality of recently enacted amendments to FUTA and the New Jersey Unemployment Compensation Law relating to "disqualifying income."

 Prior to 1970, FUTA imposed upon the states no specific guidelines for determining whether, and to what extent, unemployment compensation claimants should be disqualified from receiving full benefits if, despite their loss of work, they continued to receive "wage-replacement" income from alternative sources. Accordingly, many states chose to designate various forms of income as disqualifying income. By 1969, 46 states had enacted provisions for partially or completely reducing state unemployment compensation benefits to individuals receiving the following forms of alternative income: old age insurance benefits (16 states); payments pursuant to employer pension plans (33 states); workers' compensation payments (23 states); wages in lieu of notice (33 states); and dismissal payments (20 states). Table ET-9, Comparison of State Unemployment Insurance Laws, United States Department of Labor, Manpower Administration, Unemployment Insurance Service (January, 1972) (Defendants' Exhibit A).

 Congress tacitly approved these state provisions in section 122 of the Employment Security Amendments Act of 1970, Pub.L.No. 91-373, 84 Stat. 695 (1970), in which it referred to the concept of disqualifying income for the first time. In the 1970 amendment, Congress provided that:

 
compensation shall not be denied to any individual ... for any cause other than discharge for misconduct connected with his work, fraud in connection with a claim for compensation, or receipt of disqualifying income.
 
26 U.S.C. § 3304(a)(10) (emphasis added).

 Although the federal law still did not require states to treat any particular forms of income as disqualifying income, this amendment acknowledged and implicitly approved earlier efforts by the states to establish their own rules in the area. Following the 1970 amendment, states continued to disqualify various forms of alternative income on a non-uniform basis.

 
(T)he amount of compensation payable to an individual for any week which begins after September 30, 1979, and which begins in a period with respect to which such individual is receiving a governmental or other pension, retirement or retired pay, annuity, or any other similar periodic payment which is based on the previous work of such individual shall be reduced (but not below zero) by an amount equal to the amount of such pension, retirement or retired pay, annuity, or other payment, which is reasonably attributable to such week.
 
Unemployment Compensation Amendments of 1976, Pub.L.No. 94-566, 90 Stat. 2667 (1976).

 The practical effect of the amendment is to create, on a uniform basis throughout the United States, a dollar-for-dollar reduction of unemployment insurance benefits by income received from the designated "wage-replacement" sources. Although the amendment was originally scheduled to become effective on September 30, 1979, its effective date was subsequently extended to March 31, 1980. Pub.L.No. 95-19, 91 Stat. 39, 45 (1977).

 Shortly after § 3304(a)(15) became effective, Congress re-amended it to include the following additional language:

 
except that-
 
(A) the requirements of (the original version) shall apply to any pension, retirement or retired pay, annuity, or other similar periodic payment only if-
 
(i) such pension, retirement or retired pay, annuity, or similar payment is under a plan maintained (or contributed to) by a base period employer or chargeable employer (as determined under applicable law), and
 
(ii) in the case of such a payment not made under the Social Security Act or the Railroad Retirement Act of 1974 (or the corresponding provisions of prior law), services performed for such employer by the individual after the beginning of the base period (or remuneration for such services) affect eligibility for, or increase the amount of such pension, retirement or retired pay, annuity, or similar payment, and
 
(B) the State law may provide for limitations on the amount of any such a reduction to take into account contributions made by the individual for the pension, retirement or retired pay, annuity, or other similar periodic payment.
 
Section 414, Multiemployer Pension Plan Amendments Act of 1980, Pub.L.No. 96-364, 94 Stat. 1208 (September 26, 1980).

 The additional language alters the original amendment in two key respects. First, it limits the setoff requirement to those situations in which a single employer would otherwise be required to finance not only a claimant's unemployment insurance benefits but also his pension benefits during the same "base period." Second, it permits states to reduce the setoff by an amount representing the claimant's own contributions to a pension plan or other form of wage replacement income. *fn6"

 
The amount of benefits payable to an individual for any week which begins in a period with respect to which such individual is receiving a governmental or other pension, retirement or retired pay, annuity, or other similar periodic payment which is based on the previous work of such individual shall be reduced, but not below zero, by an amount equal to the amount of such pension, retirement or retired pay, annuity, or other payment, which is reasonably attributable to such week; provided that, such reduced weekly benefit rate shall be computed to the next higher multiple of $ 1.00 if not already a multiple thereof and that any such reduction in the weekly benefit rate shall reduce the maximum total benefits of the individual during the benefit year; provided further, that, if the provisions of the Federal Unemployment Tax Act permit, the Commissioner of Labor and Industry may prescribe in regulations which are consistent with the Federal Unemployment Tax Act either or both of the following:
 
a. The requirements of this section shall only apply in the case of a pension, retirement or retired pay, annuity, or other similar periodic payment under a plan maintained or contributed to by a base period or chargeable employer as determined under the chapter to which this act is a supplement;
 
b. The amount of any such reduction shall be determined taking into account contributions made by the individual for the pension, retirement or retired pay, annuity or other similar periodic payment. *fn7"
 
Plaintiffs in the present action mount a constitutional challenge on equal protection, due process and contracts clause grounds to both the federal and state amendments, 26 U.S.C. § ...

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