Employment Tax Rulings

Roundup of recent employment tax rulings

Mike Habib, EA

There have been several recent rulings issued in the employment tax area. Here is a summary:

Joint employment. A federal district court has ruled that a property management company was the joint employer of leasing consultants who worked out of the management company’s call center through three different staffing agencies. As a result, the management company owed the leasing consultants overtime under the Fair Labor Standards Act (FLSA). In issuing its ruling, the district court said that the management company maintained significant control over the working conditions of the leased employees. The district court noted that although the staffing agencies provided the management company with workers, it was the management company which determined the amount it would pay, including overtime, and the total number of hours that the employees could work. The management company provided the workspace and equipment. In addition, the management company could reject any of the agency employees it did not want at its facility. In addition, the leased employees were under the management company’s control and direction and were treated exactly like the management company’s contract employees performing the same job [Bastian v. Apartment Investment and Management Company, DC IL, Dkt No. 07 C 2069, 10/21/08].

Family Medical Leave Act. A federal district court has denied summary judgment to an employer that terminated an employee due to excess absenteeism. An absentee rate above a certain level was grounds for dismissal. The employee claimed that her rate would not have been above this level if her employer had factored her FMLA leave into the computation [Dickinson v. St. Cloud Hospital, DC MN, Dkt. No 07-3346 ADM/RLE, 10/20/08].

FICA tip credit. IRS Chief Counsel has concluded that the IRC §45B credit (also known as the FICA tip credit) may be claimed by an employer on its income tax return in the year (current tax year) that the IRS issued a notice and demand for payment of the FICA taxes from the employer, even though that was not the year (previous tax year) in which the unreported tips were received by the employee. The employee had failed to report the tips to his employer in the previous tax year. The employer in the current tax year received a notice and demand for the employer share of FICA taxes from the IRS. Chief Counsel concluded that for purposes of the credit, the tip amounts are deemed to be paid on the date on which the IRS notice and demand for the employer portion of the FICA tax is made to the employer [Chief Counsel Advice 200845052].

Trust fund recovery penalty. A federal appeals court has ruled that the president of a day care facility’s board of directors was a responsible person liable for the IRC §6672(a) trust fund penalty. Under IRC §6672(a), when an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In this ruling, the president played an active role in various aspects of the day care facility’s operation and could have ensured that it paid its taxes, but chose instead not to exert any authority over these business affairs. Further, he didn’t qualify for the protection from the penalty given voluntary board members under IRC §6672(a) [Jefferson v. U.S., CA 7, 102 AFTR 2d 2008-6572, 10/8/08].

Calculation of disability benefits. A federal appeals court has ruled that per diem payments that an employer made to an employee should have been classified as “wages” for purposes of calculating benefits under the Longshore and Harbor Workers’ Compensation Act. On June 10, 2002, Otis Pearley injured his back in the course of his employment with B&D Contracting. From June 2002 through January 2006, Pearley received $241.52 per week in temporary disability benefits from B&D. The company specifically excluded its per diem payments to Pearley in the calculation of his benefits rate. Pearley challenged the amount of these payments before a Department of Labor administrative law judge (ALJ). The ALJ concluded that B&D should have included Pearley’s per diem payments as wages for purposes of calculating his average weekly wage. Accordingly, the ALJ calculated Pearley’s average weekly wage as $761.98, with a corresponding benefits rate of $507.98. The Benefits Review Board (BRB) agreed with the ALJ’s ruling. The U.S. Court of Appeals for the Fifth Circuit has now denied any further review of the BRB decision [B&D Contracting v. Pearley, CA5, Dkt. No. 07-60495, 11/6/08].