Severance Pay by Any Other Name Is Just as Taxable

Q: My company has eliminated all support staff positions because of an office closure. As part of our separation agreement, in lieu of severance pay, the company is offering a settlement that “represents payment for alleged pain and suffering and mental distress, and a compromise of all claims released hereunder.” I am getting conflicting advice from my employer on what my tax liability will be for this money. They claim it will be tax-free. However, I am leery. Will I have to claim this money at the end of the year as income?

--P.U., Costa Mesa

A: The IRS views settlement agreements as early-out payments, or forced-separation payments, from the company. Therefore, the payments are not considered compensation for personal injury. These payments are considered, by law, to be taxable severance pay. Severance pay is gross income and includes, but is not limited to, wages, salaries, commissions and termination or severance pay under the Internal Revenue Code, Section 61.

--Judith A. Golden, Public affairs officer, Internal Revenue Service

Sexual Harassment Liability Depends on the Situation

Q: Even if you don’t tell a supervisor or manager that you are being sexually harassed, because of fear of retribution, and you ultimately quit for that reason, is the company still liable in a court of law?

--C.S., Seal Beach

A: It depends. First, it depends upon who was harassing you. Under California law, an employer is not liable for harassment by co-workers unless it knew or should have known about the harassment. But it is strictly liable--that is, it cannot use lack of knowledge as an excuse--when a manager or supervisor is involved.

Therefore, if the harassment was by a manager or supervisor, or if it was so blatant and pronounced that management could not claim to be unaware of it, your former employer could be liable.

However, it also depends upon whether you subjectively perceived the harassment to be offensive at the time. Both federal and California laws hold that you must actually have been offended by the conduct in order for it to be unlawful harassment. If you instigated or willingly participated in joking or sexual horseplay in the workplace, for example, you may not later claim to have been harassed by that same conduct.

Though your failure to complain about the conduct at the time will not be an absolute bar to bringing a sexual harassment lawsuit now, it may seriously damage your credibility about whether you really found the conduct to be offensive. This is particularly true if your former employer had a published policy against harassment that contained a guarantee against reprisals and/or had employee training seminars to encourage employees to come forward and report harassment.

Finally, regardless of whether you technically may sue, you must evaluate whether such a lawsuit will really be worth it. A sexual harassment lawsuit is ordinarily a long and hard battle with no guarantee of a payoff at the end. For every case you read about where someone hit the jackpot, there are dozens of cases where plaintiffs recover little or nothing after the attorneys, doctors and other experts have been paid, and after several years of their lives have been consumed. Particularly if you have obtained a new job, it may be best to move forward with your life and let go of the past.

--James J. McDonald Jr., Attorney, Fisher & Phillips, Labor law instructor, UC Irvine

Unemployment Fund Payments Set by Wages

Q: As an employer, at what point do you have to pay into the state unemployment insurance fund for part-time, temporary clerical workers? How many hours must they work before you provide them such coverage? Would it be smarter to use a temporary employment agency?

--J.C., Anaheim

A: Employer contributions into California’s unemployment compensation system are based on wages paid for employment, not the number of hours worked by an employee. Wages include money, bonuses, commissions and tips.

The employer is required to contribute up to a specified amount in each calendar year, based on a statutory rate. The contribution rate is determined by the amount of money in the unemployment compensation fund and the balance in the employer’s reserve account.

Using a temporary service agency may eliminate your responsibility to make contributions, but that approach is highly regulated. To avoid contributions, the employer must contract with the temporary service agency to supply a worker.

Though an employer can set the time, place and type of work to be performed, the agency must be responsible for hiring and firing the worker and setting and paying the worker’s wages from its own account and must have the authority to assign and reassign a particular worker to different workplaces. Failure to comply with those regulations may lead to a finding that the person works for the employer, not the temporary service agency.

--William H. Hackel III, Employment law attorney, Spray, Gould & Bowers

Six-Week Furlough Can Be Called a Termination

Q: Instead of being laid off, my husband was furloughed from his job six weeks ago, along with most of the company employees. We suspect this is a way for the company to avoid paying for unused vacation. They also owe him two months’ back pay. The company has not filed for bankruptcy, and a few employees still work there. What should we do to try to obtain the money owed him?

--L.O., Huntington Beach

A: A person who is laid off because of a lack of work normally goes to a state Employment Development Department field office to file a claim for unemployment benefits. Regardless of whether the reported layoff, or furlough, was permanent or temporary, the person who is out of work will be entitled to receive unemployment insurance benefits, as long as the person is otherwise eligible by being able to work, available for work and so forth.

Certainly after six weeks of no work availability, and no anticipated date to return to work, the furlough will be treated as a termination, regardless of whether the employee has been separated from the employer payroll.

Your husband should review the company vacation policy to determine vacation accruals and the stated amount owed, earned or accrued at the time of furlough. He also should determine the dollar amount owed for the two months’ back payment of wages. I recommend your husband then send a certified letter with a request for payment for all money owed be paid as soon as possible.

If the employer fails to respond to the request, then the next recourse is to file a complaint with the appropriate wage and hour agency. The California Division of Labor Standards Enforcement will request and review all pertinent information supplied by both the employee and employer and make a determination ruling on the presented evidence.

--Elizabeth Winfree-Lydon, Senior staff consultant, The Employers Group