U.S. Supreme Court to Decide Whether Lost Wage Damages are Subject to Employment Taxes

The U.S. Supreme Court will determine whether a railroad’s payment to an employee for time lost from work is subject to employment taxes under the Railroad Retirement Tax Act (“RRTA”). The plaintiff in his FELA claim against the railroad obtained a judgment for damages that included, in part, damages for lost wages. The trial court entered judgment for the entire verdict. The railroad then moved to amend the judgment to reduce it for the amount to cover payroll taxes that the plaintiff owed to the IRS under the Railroad Retirement Tax Act. The district court refused the request and the 8th U.S. Circuit Court of Appeals affirmed ruling that “time lost” did not constitute taxable compensation under the RRTA. This rule conflicted with earlier decisions by the 6th U.S. Circuit Court of Appeals and a handful of state court opinions.

The 8th Circuit reasoned that the plain language of the RRTA regarding “compensation” requires that it be for actual performance of service and that the interpretation by the IRS to the contrary should be given no deference because of the Chevron decision (SCOTUS ruling whether or not courts should give deference to an administrator’s interpretation of a law or statute).

IRS regulation defines compensation as any form of monetary “remuneration paid to an individual for services rendered as an employee to one or more employers … including remuneration paid for time lost as an employee.” This definition is much broader than the language of the RRTA and as argued by the railroad would require withholding taxes in order to comply with the IRS regulation. The United States joined in support of the railroad’s position. Noncompliance with the IRS regulation could subject the railroad to fines and liability making the split among the circuits untenable.

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