The opinion adopts well-established federal law and overturns a 22-year-old California case that held that withholding was not required.
Everyone knows that, when an employer pays wages to an employee, the employer must withhold federal and state income taxes and social security (FICA). But what happens when a terminated employee receives an amount from the employer as a result of a lawsuit involving wrongful termination or discrimination? Does it matter if the lawsuit involves back pay or front pay? Is there a difference if the payment is the result of a settlement or a judgment? What if state law clashes with federal law?
These questions have been fairly well settled under federal law for a number of years, and withholding is required. However, California only recently adopted the federal law in Cifuentes v. Costco Wholesale Corp.1 There, the Court of Appeals of California overturned the lower court and declined to follow a 22-year-old California case that had held that withholding was not required.
In Cifuentes, a dispute between Costco and its former employee Carlos Cifuentes resulted in a judgment in favor of Cifuentes after a jury trial. The dispute stemmed from Cifuentes’ report to his supervisor that he observed a manager hugging a female employee. Six months later, the manager reported that he saw Cifuentes sipping a beverage sold by Costco without paying for it. Costco fired Cifuentes for violating its policy against food consumption. Cifuentes sued for wrongful termination/breach of contract.
At trial, the jury awarded him $28,125 for past wages and $273,253 for future wage loss. When Costco paid the judgment, it withheld $116,150.84 in payroll taxes from the $301,378 attributed to lost wages. Costco informed Cifuentes that it had fully satisfied the judgment and demanded that Cifuentes acknowledge full satisfaction. Cifuentes disputed the withholding, claiming that Costco should have paid him the full judgment amount, issued Form 1099, and allowed him to pay any taxes due directly to the taxing authorities. The amount in controversy was reduced when Cifuentes received tax refunds from the Internal Revenue Service (IRS) and from California. At that point, Costco again demanded that Cifuentes acknowledge satisfaction of the judgment, which Cifuentes refused to do. Costco then asked the court for an acknowledgement of the satisfaction of judgment.
Cifuentes based his position on Lisec v. United Airlines, Inc.,2 which held that an employer is not required to withhold payroll taxes from an award of lost wages to a former employee. Believing that it was bound by Lisec, the trial court ruled that the withholding was improper and denied Costco’s motion for acknowledgment of satisfaction of the judgment. On appeal, the California Court of Appeals overturned the trial court. It ruled in Costco’s favor that lost past wages and lost future wages are subject to withholding, in effect overruling Lisec.
In support of Costco’s argument that the payments to Cifuentes were...
