On appeal from the Superior Court of New Jersey, Law Division, Essex County, L-8472-04.
The opinion of the court was delivered by: Axelrad, J.T.C. (temporarily assigned).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Skillman, Axelrad and Sabatino.
The issue before us is whether an employer may deduct state and federal withholding taxes from back pay arbitration awards when a union employee is reinstated. The trial judge held it may not and directed payment of the gross award to the employee. We reverse.
Plaintiff Amalgamated Transit Union, Local 880 and defendant New Jersey Transit Bus Operations, Inc. (NJT) are parties to a collective bargaining agreement, which requires binding and final arbitration of grievances. NJT terminated three of its employees, Bernard Bryson, David Owens and Bobby Harrison, for improper conduct. The union filed grievances on their behalf and demanded arbitration. In all three cases, the arbitrator ruled that NJT demonstrated a basis for disciplinary action, but that termination was too harsh a sanction. The arbitration awards reduced each penalty to a suspension, reinstated the grievant to his respective job and ordered back pay from the end of the suspension period to the employee's return to work. Each employee returned to work with employment benefits and seniority rights as if his job were never terminated, and NJT erased the termination from the employees' personnel files.
The union filed suit to confirm the arbitration awards, and to direct NJT to pay the back pay the union contended was owed to each grievant. Pertinent to this appeal, the legal dispute between the parties concerned the issue of whether the payments to the reinstated employees should be gross or net of income taxes. NJT sought to withhold federal and state taxes from the back pay arbitration awards, contending the awards constituted wages under federal and state law. See 26 U.S.C.A. § 3401 (defining "wages" as "all remuneration . . . for services performed by an employee for his employer . . . ."); N.J.S.A. 54A:5-1a (Compensation for purposes of New Jersey gross income tax consists of the following categories of income: "Salaries, wages, tips, fees, commissions, bonuses, and other remuneration received for services rendered . . . ."); see also Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 66 S.Ct. 637, 90 L.Ed. 718 (1946) (holding that a back pay award under the National Labor Relations Act to an employee who was wrongfully discharged for union activity and was reinstated was treated as wages under the Social Security Act).
NJT argued it was thus obligated to make appropriate deductions. See 26 U.S.C.A. § 3402(a)(1) (which requires every employer making payment of wages to withhold income taxes from those wages); N.J.S.A. 54A:7-1(a) (imposing a similar obligation on an employer maintaining an office or transacting business in New Jersey who pays wages subject to New Jersey personal income tax).
The union sought payment of the awards without withholding, though not denying they comprised taxable income. It relied upon the opinion in Sang-Hoon Kim v. Monmouth College, 320 N.J. Super. 157 (Law Div. l998), involving a faculty member who was terminated based on national origin, and who obtained a damage award for past lost income based on a jury determination of discrimination under the New Jersey Law Against Discrimination (LAD) but no cause of action on his contract claim. The professor, who had been fired five years prior to the award and had never been rehired, did not seek reinstatement. The judge in Kim held that the award did not constitute wages and was thus not subject to deduction of withholding taxes under the Internal Revenue Code. The court reasoned that the definition of "wages" contemplated the "performance of services by the employee," and since damages were awarded for a time period during which plaintiff was no longer working for the employer and there was no employer-employee relationship at the time of the payment, he was not performing services and thus not earning wages. Id. at 160. Here, NJT argued to the Law Division that Kim was distinguishable because his relationship with his employer ended five years before the jury award, while its three employees had been reinstated to their positions and continued in an employer/employee relationship.
By order of January 13, 2005, the trial judge confirmed the arbitration awards as judgments and directed "[w]ith respect to the respective amounts of back pay due each grievant, there shall be no taxes deducted from the back pay awards except as otherwise authorized by the grievant." Based on oral argument, it appears she inferentially adopted the rationale of Kim. By order of April 21, 2005, judgment was entered in favor of the union on behalf of Harrison in the amount of $16,975.34, Owens in the amount of $34,823.03, and Bryson in the amount of $15,201.89, with the individual employees to be responsible for all state, federal and local taxes. NJT's request for a stay of the judgment was denied by the trial court on June 24, 2005, and by us on August l8, 2005.
During the pendency of this appeal, a Law Division judge decided a case involving almost the identical fact pattern and legal issue that we have before us. Amalgamated Transit Union, Local 1317 v. DeCamp Bus Lines, 382 N.J. Super. 418 (Law Div. 2005). That case also involved a suit by the union to confirm an arbitration award reinstating a suspended bus driver and awarding back pay. It likewise involved an assertion by the union, among other claims, that the bus driver's award, and that of another employee, who an arbitrator found had been deprived of an opportunity to earn more money by driving a charter run, were not "wages" and not subject to withholding taxes. In DeCamp, Judge Goldman held that back pay arbitration awards constituted wages and thus were subject to deduction for FUTA (Federal Unemployment), FICA (Social Security and Medicare), and other employment taxes and withholdings, because they were paid as a consequence of the continuing employer-employee relationship.*fn1 The judge distinguished Kim based on the nature of the existing employment relationship as well as the nature of the award. Id. at 422-23. Reasoning that employment taxes are payable only when wages are paid to an employee, he noted the absence of an employer-employee relationship in Kim. Id. at 422. In contrast to the former employee in Kim, however, the bus drivers were never terminated by DeCamp and remained DeCamp employees. Thus, their payments for back wages were being made within their existing employment relationship with DeCamp. Id. at 423. Additionally, contrary to Kim, the awards to the bus drivers were purely contractual in nature under their collective bargaining agreement; they were not awards in which lost wages were used as a basis for what are essentially tort claims such as those asserted under LAD or other anti-discrimination laws. Ibid.
In a cogent opinion, Judge Goldman began his analysis with Nierotko as the cornerstone for his conclusion that the back pay award constituted wages. DeCamp, supra, 382 N.J. Super. at 423. In Nierotko, the reinstated employee sought to have his back pay award treated as wages under the Social Security Act in order to obtain credit towards old age benefits. 327 U.S. at 359, 66 S.Ct. at 638, 90 L.Ed. at 722. Under Section 210 of the Social Security Act, "wages" were defined as "all remuneration for employment," with employment encompassing "any service, of whatever nature, performed within the United States by an employee for his employer . . . ." 327 U.S. at 362-63, 66 S.Ct. at 640, 90 L.Ed. 723. The Supreme Court found the back pay for the time Nierotko was wrongfully separated from his job to be clearly "remuneration" and "wages" rather than a fine or penalty for the employer's wrongdoing. 327 U.S. at 364-65, 66 S.Ct. at 641, 90 L.Ed. at 724-25.
In reaching this conclusion, the Supreme Court focused on the employment relationship, not whether the employee actually performed a task during the period encompassed by the award. The Court expressly rejected the employer's argument that Nierotko did not perform any service for the period for which he was awarded back pay. 327 U.S. at 365-66, 66 S.Ct. at 641, 90 L.Ed. at 725. It noted that various Social Security regulations classified dismissal pay, vacation allowances and sick pay as wages, an administrative decision that considered jury compensation as wages, and an IRS regulation that also classified vacation allowances and dismissal pay as wages under the statutory definition of "remuneration . . . for services performed by an employee ...