NLRB Rules Employers Must Gross Up Backpay Awards and Have Reporting Obligations

1.24.13

By Janet B. Hutchison

The National Labor Relations Board (NLRB) has dealt another blow to employers who lose a labor dispute under the National Labor Relations Act (NLRA). In a recent decision, Latino Express, Inc. v. International Brotherhood of Teamsters, Local 777, 359 NLRB No. 44(2012), the NLRB ruled that employers will be required to compensate employees for any extra taxes the employee would incur resulting from lump-sum backpay awards. Further, the NLRB held that employers must submit documentation to the Social Security Administration so that when backpay is paid, it will be allocated to the appropriate calendar quarters.

Under the remedial policies of the NLRB, when workers receive an award of backpay under the NLRA, the amount is computed on the basis of separate calendar quarters but paid in one lump sum. Because the backpay is considered“wages,” it is subject to a withholding of Social Security taxes. The Board reasoned that the victim may continue to suffer the effects of the unlawful actions of the employer unless the backpay is properly allocated to the appropriate time periods for Social Security purposes.

Further, the IRS considers a backpay award to be income earned in the year the award is paid, regardless of when the income should have been received. According to the Board, this might result in the worker being pushed into a higher tax bracket. Thus, the Board determined that the employee would not truly be made whole from the unlawful act unless the employer pays any extra taxes resulting from the lump sum payment.

The NLRB ruled that these changes will be applied retroactively and, therefore, will be included in remedial orders in both future and currently-pending cases.