Trial News

Lost wages damages that railroad employees are awarded are taxable compensation under the Railroad Retirement Tax Act (RRTA), the U.S. Supreme Court has ruled in a 7-2 decision. Comparing the structure of the RRTA to Social Security, the Court held that lost wages damages are remuneration paid for services rendered as an employee—even during times of absence such as recovery from an on-the-job injury. (BNSF Ry. Co. v. Loos, 2019 WL 1005830 (U.S. Mar. 4, 2019).)

Michael Loos suffered a knee injury while in the BNSF railyard and sued his employer under the Federal Employer’s Liability Act (FELA). A jury verdict included $30,000 in lost wages, which BNSF claimed was taxable under the RRTA and requested to withhold the amount it would owe for the taxes as his employer. The RRTA functions similarly to Social Security as a payroll tax through which the employer and employee each pay a portion based on the employee’s wages to contribute to a set of benefits for railroad workers. The trial court and the Eighth Circuit denied the defendant’s request for the tax offset, holding that the term “compensation” in the RRTA applied only to payment for active service to an employer. BNSF petitioned for certiorari to the Supreme Court to determine what is considered compensation under the statute.

The Court reversed the Eighth Circuit, finding that the RRTA and its case law include pay for periods of absence if the payment arises from the employer-employee relationship. The statute defines compensation as “any form of money remuneration paid to an individual for services rendered as an employee.” The Court noted that one year after the statute was enacted, IRS regulations explained that compensation included pay for active service and periods of absence. In 1994, the IRS added “pay for time lost” to its regulations.

The RRTA’s definition of compensation is similar to the Social Security Act’s and Federal Income Contributions Act’s definitions of “wages” as “all remuneration for employment.” Because of this, the court reasoned, case law governing what is included as wages in the Social Security context applied here. Relying on two cases (Social Security Board v. Nierotko, 327 U.S. 358 (1946), and United States v. Quality Stores, Inc., 572 U.S. 141 (2014)) that held that back pay for wrongful termination and severance pay fell within the wages purview, the Court determined that RRTA compensation functioned in the same way—applying to an employee’s periods of active and inactive service to an employer.

The Court further concluded that lost wages damages fell under this umbrella because they “are functionally equivalent to an award of backpay, which compensates an employee ‘for a period of time during which’ the employee is ‘wrongfully separated from his job.’” The Court disagreed with the Eighth Circuit’s finding that the compensation encompasses pay only for services that an employee rendered, as well as its contention that when Congress removed references to payment for time lost in previous iterations of the RRTA that it then intended for compensation to no longer include lost wages. The Court pointed to enumerated exceptions in the statute for certain types of pay, such as sick and disability pay, as evidence that if Congress had intended for lost wages to be exempt, it would have added them to this list.

The Court also was not persuaded by the plaintiff’s argument that “remuneration” refers to the “package of benefits” that an employer provides to an employee, such as paid time off, but that damages for lost wages are a different type of compensation—for an injury suffered due to the employer’s negligence rather than in return for a service rendered as an employee. Analogizing this to the employer’s wrongful conduct in Nierotko—in which back pay for wrongful termination was considered part of the employee’s wages—the Court concluded that there was no dispositive difference.

The plaintiff also argued that personal injury damages are not taxable income because the IRS exempts such damages from someone’s gross income calculation. But since the term gross income is not used in the RRTA and because compensation is not an income tax but rather the basis for which the employer and employee pay out their share of contributions, the IRS exemption does not apply.

In his dissent, Justice Neil Gorsuch, joined by Justice Clarence Thomas, adopted the plaintiff’s view that lost wages damages were compensation for the injury rather than for services as an employee: “No one would describe a dangerous fall or the wrenching of a knee as a ‘service rendered’ to the party who negligently caused the accident.” Gorsuch also compared the employer’s liability under FELA to a situation in which a passenger was injured on its railway and recovered lost wages, noting that no one would expect those lost wages to be regarded as compensation for services rendered to the passenger’s employee instead of compensation for the injury and that the result should not be different just because the injured party was one of the negligent party’s employees.

Jeffrey White, associate general counsel for AAJ, who authored AAJ’s amicus brief in support of the plaintiff, explained, “Permitting railroads to withhold RRTA taxes from FELA awards for past lost wages undermines the beneficial congressional purpose served by FELA and impedes fair settlements of FELA claims that involve lost wages. Congress enacted FELA in response to widespread on-the-job injuries and deaths among rail workers. By establishing a statutory negligence cause of action, Congress intended to provide compensation for wrongfully injured workers and their families, and to provide a financial incentive for railroads to invest in safe workplaces for their employees. . . . A rule subjecting FELA awards to RRTA tax will diminish the net compensation recoverable by injured claimants.”

White also cautioned that the ruling could be used by defendants “to obtain an unfair advantage in settlement negotiations. . . . Where all or part of a verdict award would be subject to RRTA taxes, the railroad can reduce its settlement offer by proposing to allocate little or none of the settlement amount to lost past income. The parties’ allocation of settlement proceeds generally dictates the tax consequences. In this manner, the railroad will be able to extract a lower settlement than it might otherwise obtain through negotiations, including settlements following a jury verdict.”