Reversing and remanding the judgment of the Eighth Circuit, the High Court, in a 7-2 decision, held that FELA damages for lost wages qualify as RRTA-taxable “compensation.”
“Compensation” for Railroad Retirement Tax Act (RRTA) purposes includes an employer’s payments to an employee for active service and for periods of absence from active service, a divided U.S. Supreme Court held, overruling an Eighth Circuit decision holding that an award of damages compensating an injured railroad worker for lost wages was not taxable under the statute. “It is immaterial whether the employer chooses to make the payment or is legally required to do so,” wrote Justice Ginsburg for the majority. “Either way, the payment is remitted to the recipient because of his status as a service-rendering employee.” Justice Gorsuch, with whom Justice Thomas joined in dissent, argued that “When an employee suffers a physical injury due to his employer’s negligence and has to sue in court to recover damages, it seems more natural to me to describe the final judgment as compensation for his injury than for services (never) rendered” (BNSF Railway Co. v. Loos, March 4, 2019, Ginsburg, R).
While working in a BNSF train yard, the employee fell into a hidden drainage grate and injured his knee, causing him to be out of work for several months. Upon his return, he had a series of absences, several of which he attributed to flare-ups of his injury. When BNSF moved to fire him for violating its attendance policies, he sued under the Federal Employers’ Liability Act (FELA), seeking among other things damages for BNSF’s negligence in maintaining the train yard.
Jury award. A jury ultimately awarded him $126,212 in damages, ascribing $30,000 of the award to wages lost during the time he was unable to work. Contending that the $30,000 represented “compensation” taxable under the RRTA, BNSF argued that it was required to withhold $3,765 to cover the employee’s share of RRTA taxes. Rejecting the requested offset, the district court and the Eighth Circuit held that the employee’s award wasn’t subject to RRTA taxes.
RRTA and RRA. Reversing the Eighth Circuit’s decision, the High Court first observed that Congress, through the RRTA and the Railroad Retirement Act (RRA), created a system to ensure that retired railroad workers receive their allotted pensions and benefits. The RRTA funds the program by imposing a payroll tax on both railroads and their employees, and it assigned to the IRS responsibility for collecting both taxes. The RRA entitles railroad workers to various benefits and prescribes eligibility requirements.
Taxes under the RRTA and benefits under the RRA are measured by an employee’s “compensation.” And while both statutes separately define “compensation,” they both state that the term means “any form of money remuneration paid to an individual for services rendered as an employee.” Noting further that Congress created both the railroad retirement system and the Social Security system around the same time to ensure the financial security of the workforce, the Court pointed out that their “statutory foundations mirror each other.”
Statutory text. Turning to the text of the RRTA, the court noted that its definition of compensation is materially indistinguishable from the Federal Insurance Contributions Act’s definition of “wages” to include “remuneration” for “any service, of whatever nature, performed . . . by an employee.” Given the textual similarity between the definitions of “compensation” for railroad retirement purposes and “wages” for Social Security purposes, the Court found its decisions on the meaning of “wages” in Social Security Bd. v. Nierotko, and United States v. Quality Stores, Inc., “inform our comprehension of the RRTA term ‘compensation.’”
Nierotko. Nierotko involved an award of backpay by the NLRB to a wrongfully discharged employee. Although the Social Security Board refused to credit the backpay award in calculating the employee’s benefits, the Court held that wages embraced pay for active service, plus pay received for periods of absence for active service, and thus backpay counted as wages because it compensated for the loss of wages the employee suffered from the wrongful discharge.
Quality Stores. Guided by Nierotko, the Court in Quality Stores held that severance payments qualified as “wages” taxable under the FICA. Thus, said the Court, “in line with Nierotko, Quality Stores, and the IRS’s long held construction, we hold that ‘compensation” under the RRTA encompasses not simply pay for active service but, in addition, pay for periods of absence from active service—provided that the remuneration in question stems from the ‘employer-employee relationship.’”
FELA damages. Damages awarded under FELA for lost wages “fit comfortably within this definition,” the Court stated, noting that FELA damages for lost wages are functionally equivalent to an award of backpay. “Just as Nierotko held that backpay falls within the definition of ‘wages,’ we conclude that FELA damages for lost wages qualify as ‘compensation’ and are therefore taxable under the RRTA,” wrote Ginsburg.
In support of its holding, the Court also looked to the history of the RRTA, including several amendments, finding that the statute’s text continues to indicate that compensation encompasses pay for time lost. Pointing out that it excludes from compensation a limited subset of payments for time lost—notably certain types of sick and disability pay—the Court reasoned that these enumerated exclusions would be entirely superfluous if the RRTA broadly excludes from compensation any and all pay received for time lost.
Compensation for injury. As to the employee’s contention that FELA damages compensate for an injury rather than for services rendered, and alternatively that even if voluntary settlements qualify as compensation, involuntary payments in the form of damages do not, the Court found that Nierotko undermined this argument. Explaining that in Nierotko, it held that an award of backpay compensating an employee for his wrongful discharge ranked as “wages” under the SSA because the backpay redressed “the loss of wages” occasioned by “the employer’s wrong,” the Court found that applying “that reasoning here, there should be no dispositive difference between a payment voluntarily made and one required by law.”
Also rejected was the employee’s argument that the RRTA’s tax on employees does not apply to personal injury damages because the RRTA taxes “the income of each employee” and IRC Section 104(a)(2) exempts “damages . . . received on account of personal physical injuries from “gross income.” But, said the Court, this conflates “the distinct concepts of ‘gross income,’ [a prime component of] the tax base on which income tax is collected, and ‘compensation,’ the separately defined category of payments that are taxable under the RRTA.” And Congress, the Court explained, specified not “gross income” but employee “compensation” as the tax base for the RRTA’s income and excise taxes.
Dissent. In dissent, Justice Gorsuch argued that “Under the rule BNSF seeks and wins today, RRTA taxes will be due on (but only on) the portion of a FELA settlement or judgment designated as lost wages.” Noting that juries will often attribute a significant portion of damages to lost wages, he contended that “railroads like BSNF can now sweeten their settlement offers while offering less money. Forgo trial and accept a lower settlement, they will tell injured workers, and in return we will designate a small fraction (maybe even none) of the payments as taxable lost wages.” The majority’s decision, he asserted, may “mean that employees will pay a tax for going to trial—and railroads will succeed in buying cheaper settlements in the future at the bargain basement price of a few thousand dollars in excise taxes in one case today.”
Justice Gorsuch also took issue with the majority’s view of the RRTA’s statutory history, noting that in 1975 Congress removed payments “for time lost” from the RRTA’s definition of “compensation.” And in 1983, it overwrote the last remaining reference to payments “for time lost” in a nearby section. “To my mind,” Gorsuch wrote, “Congress’s decision to remove the only language that could have fairly captured the damages here cannot be easily ignored.”
As to the majority’s reliance on Nierotko, the Justice noted that this concerned a different statute, a different legal claim, and a different factual context.
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