NATALE v. EAST COAST SALON SERVICES, INC. et al
Filing
76
OPINION. Signed by Judge Noel L. Hillman on 2/17/2016. (drw)
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
:
:
:
Plaintiff,
:
:
v.
:
:
EAST COAST SALON
:
SERVICES, INC.,
:
:
Defendant.
:
:
______________________________ :
CAROL E. NATALE,
Civil Action No.
13-1254 (NLH/JS)
OPINION
Appearances:
RICHARD J. ALBANESE
KARPF, KARPF & CERUTTI, P.C.
3331 STREET ROAD, SUITE 128
TWO GREENWOOD SQUARE
BENSALEM, PA 19020
On behalf of plaintiff
MICHAEL S. HANAN
GORDON & REES LLP
18 COLUMBIA TURNPIKE
SUITE 220
FLORHAM PARK, NJ 07932
On behalf of defendant
HILLMAN, District Judge
Presently before the Court is the motion 1 of defendant to
enforce the settlement agreement, which, on the eve of trial,
1
The parties filed their briefs and exhibits under seal and in
redacted form pursuant to the Court’s Order granting defendant’s
motion to seal. (Docket No. 71.) The content of this Opinion
resolving defendant’s motion to enforce the settlement agreement
only withholds information that qualifies for restricted public
access under Local Civil Rule 5.3.
resolved plaintiff’s claims against her former employer for
alleged violations of the Age Discrimination in Employment Act
(ADEA), 29 U.S.C. § 621 et seq. 2
The settlement issue in dispute
concerns whether the settlement funds were to be paid to
plaintiff pursuant to a Form 1099-MISC or a Form W-2.
Defendant
argues that during the settlement discussions at the pre-trial
conference, plaintiff and defendant had a meeting of the minds
that plaintiff would be paid via a 1099 form.
Plaintiff
counters that the vehicle for payment of the settlement funds
was not agreed to at the conference.
When a draft of the
settlement agreement was provided to plaintiff’s counsel, and
plaintiff’s counsel requested that plaintiff be paid by a W-2
based upon advice from an accountant, plaintiff argues that her
request is not barred by any prior agreement that she be paid by
1099.
She also argues that the method of payment is a non-
essential term of the agreement.
The method of payment is a sticking point between the
parties because if plaintiff is paid by W-2, defendant is
obligated to deduct applicable taxes, as well as withholdings
for Social Security and Medicare, and pay its employer tax.
2
If
When the case settled, the Court retained jurisdiction for
sixty days to reopen the matter if the settlement was not
consummated. (Docket No. 65.) At the parties’ request, the
retention of jurisdiction was extended for an additional ninety
days (Docket No. 67), during which time defendant filed its
motion to enforce the settlement.
2
plaintiff is paid by 1099, she is responsible for all of these
taxes.
Defendant argues that having to pay plaintiff by W-2
would constitute a windfall beyond the agreed-upon settlement
amount.
Plaintiff argues that defendant is required by the tax
code to pay her by W-2 because ADEA damages can only be
classified as wages. 3
As will be explained more below, the Court finds the
following: (1) the record suggests that the settlement entered
into at the pre-trial conference, to be memorialized later in a
formal written settlement agreement, did not specifically
contemplate whether the funds should be paid by 1099 or W-2,
although the record also suggests that payment by 1099 was
3
The ADEA does not permit a separate recovery of compensatory
damages for pain and suffering or emotional distress, and a
recovery under the ADEA is not excludable from gross income.
C.I.R. v. Schleier, 515 U.S. 323, 326 (1995). Other employment
discrimination laws permit recovery for emotional distress and
other non-wage damages. Although awards under these laws have
tax implications, any award for non-wage damages must be paid by
1099 and not W-2. See Eshelman v. Agere Sys., Inc., 554 F.3d
426, 441 (3d Cir. 2009) (“The Supreme Court made clear that back
pay awards under discrimination statutes are taxable.”); see
also Lawsuits, Awards, and Settlements Audit Techniques Guide,
available at https://www.irs.gov/Businesses/Small-Businesses-&Self-Employed/Lawsuits-Awards-and-Settlements-Audit-TechniquesGuide#_Toc305586649, (citing IRC §§ 6041 and 6051 and Treasury
Regulations 1.6041-1(f) and 1.6041-2) (“Generally, all
compensatory damages for non-physical injuries or sickness (for
example, emotional distress) arising from employment
discrimination or defamation are reportable in Box 3 [of Form
1099-MISC;] however, if a taxpayer receives an award of back pay
that constitutes wages, it generally would be reportable on Form
W-2, not Form 1099-MISC.”).
3
presumed by counsel for both sides until plaintiff met with her
accountant; (2) there is no uniform consensus on the proper
payment of such settlement funds in courts throughout the
country or in the legal literature; and (3) it appears that the
IRS views that that settlement payments that constitute “wages”
paid by an employer to an employee must be paid by the employer
in the form of a W-2.
As a primary matter, the law governing the enforcement of a
settlement agreement holds that a settlement agreement between
parties to a lawsuit is a contract like any other contract.
Peskin v. Peskin, 638 A.2d 849, 857 (N.J. Super. Ct. App. Div.
1994) (citing Nolan v. Lee Ho, 577 A.2d 143, 146 (N.J. 1990)).
A contract is formed where there is offer and acceptance and
terms sufficiently definite that the performance to be rendered
by each party can be ascertained with reasonable certainty.
U.S. v. Lightman, 988 F. Supp. 448, 458 (D.N.J. 1997) (citing
Weichert Co. Realtors v. Ryan, 128 N.J. 427, 435, 608 A.2d 280
(1992)).
That contract is enforceable if the parties agree on
essential terms, and manifest an intention to be bound by those
terms.
Id.
Where the parties do not agree on one or more
essential terms, however, courts generally hold that the
agreement is unenforceable.
Id.
The party seeking to enforce
the alleged settlement agreement has the burden of proving the
existence of the agreement under contract law.
4
Id. (citations
omitted).
Courts treat a motion to enforce settlement under the
same standard as a motion for summary judgment because the
central issue is whether there is any disputed issue of material
fact as to the validity of the settlement agreement.
Washington
v. Klem, 388 F. App’x 84, 85 (3d Cir. 2010) (citing Tiernan v.
Devoe, 923 F.2d 1024, 1031 (3d Cir. 1991)).
The mechanics of the payment of settlement funds typically
constitutes a non-essential term of the settlement contract.
See, e.g., McDonnell v. Engine Distributors, No. CIV.A. 03-1999,
2007 WL 2814628, at *8 (D.N.J. Sept. 24, 2007), aff'd, 314 F.
App'x 509 (3d Cir. 2009) (“The disputed terms - concerning the
scope of the release, ensuring payment, tax treatment,
indemnification, and the scope of confidentiality - all speak to
the settlement's implementation.
They are not, however,
essentials of the settlement.”); Josifovich v. Secure Computing
Corp., No. CIV. 07-5469FLW, 2009 WL 2390611, at *2 (D.N.J. July
31, 2009) (observing that “terms relating to the tax treatment
of a settlement agreement are not considered essential, but
rather are part of the implementation of the settlement
agreement”).
In this case, the Court finds that the precise method of
payment was not a term the parties agreed upon before announcing
their settlement but was left by the parties to be decided
during the during the “fleshing out” period between the oral
5
agreement and a written settlement agreement.
“Where the
parties agree upon the essential terms of a settlement, so that
the mechanics can be ‘fleshed out’ in a writing to be thereafter
executed, the settlement will be enforced notwithstanding the
fact the writing does not materialize because a party later
reneges.”
See Sipler v. Trans Am Trucking, Inc., 881 F. Supp.
2d 635, 637 (D.N.J. 2012) (citing Lahue v. Pio Costa, 623 A.2d
775 (N.J. Super. App. Div. 1993), cert. denied, 634 A.2d 524
(N.J. 1993)).
Here, five days after the pre-trial conference in which the
parties settled the matter, plaintiff’s counsel affirmatively
stated in an email to defense counsel, “I also ask that the
agreement reflect payment within 30 days of execution, and
separate checks to Ms. Natale and my firm.
I also wanted to
inquire if it was possible to have the payment made by 1099 as
opposed to W-2.”
Plaintiff’s counsel also did not take issue
with the indemnification provision which made all tax
liabilities plaintiff’s responsibility.
It was not until
plaintiff visited her accountant who advised her to not sign the
agreement unless she was paid by W-2, which was a month after
the settlement conference and after several email exchanges
between counsel, that the issue of the form of payment became a
6
deal breaker in plaintiff’s eyes. 4
This fact and others lead the
Court to conclude that the method of payment was not
contemplated by the parties to be an essential element of the
settlement. 5
A settlement agreement is a contract, and the court has
“no right to rewrite the contract” or “remake a better contract
for the parties than they themselves have seen fit to enter
into.”
Karl's Sales & Serv., Inc. v. Gimbel Bros., 592 A.2d
647, 650 (N.J. Super. Ct. App. Div. 1991) (citing James v.
Federal Ins. Co., 5 N.J. 21, 24, 73 A.2d 720 (1950)) (other
citations omitted).
Because there are tax consequences of every
4
Plaintiff argues that because she did not review the written
document during the time counsel were exchanging drafts and had
agreed to payment by 1099, the settlement was not yet approved.
That is not a position supported by the law. See, Sipler, 881
F. Supp. 2d at 637; U.S. v. Lightman, 988 F. Supp. 448, 459
(D.N.J. 1997) (citations omitted) (“New Jersey law specifies
that parties may orally, by informal memorandum, or both, agree
upon all essential terms of a contract and effectively bind
themselves thereon, if that is their intention, even though they
contemplate the later execution of a formal document to
memorialize their undertaking.”).
5
Defense counsel states that the issue of payment via 1099 was
discussed in “open court,” while plaintiff’s counsel states that
the form of payment was not discussed at all during the March
25, 2015 court appearance. The entire settlement conference was
held off-the-record, so no transcript exists of what was stated
in “open court” that can prove or disprove counsel’s
recollections. As noted by plaintiff’s counsel, however, the
fact that five days after the court hearing he requested payment
by way of a 1099 suggests that it was an issue not specifically
discussed at the conference, or if it was, it was not an
essential term of the settlement.
7
settlement, plaintiff or defendant in this case could have
raised the form of payment during settlement negotiations and
made it an essential term of the contract. 6
It is clear that the parties entered into an agreement to
settle the matter for a specific amount at the pre-trial
conference on March 25, 2015, and that payment via Form 1099 or
Form W-2 was not an essential term of the settlement.
The Court
must therefore addresses plaintiff’s argument that a settlement
of an ADEA claim paid in the form of a 1099 instead of a W-2
would be contrary to law, and would therefore render the
settlement contract unenforceable.
The caselaw on this issue is not so clear.
For example,
the court in Lisec v. United Airlines, Inc., 10 Cal. App. 4th
1500, 1507, 11 Cal. Rptr. 2d 689, 693 (1992) found that because
an award paid to a former employee was not made within the
context of an ongoing employment relationship – i.e., an award
of back pay covering a period of time when the employee did not
actually perform any work for the employer – the award could not
be considered wages and thus could not be subject to employment
taxes.
Several federal and state courts followed Lisec’s
reasoning, including in the Eastern District of Pennsylvania and
6
The pre-trial conference before this Court was not the first
settlement talks involving the Court’s facilitation of, and
assistance with, settlement. (See Minute Entries for March 3,
2015 and March 17, 2015.)
8
New Jersey.
See Churchill v. Star Enterprises, 3 F. Supp. 2d
622, 624–25 (E.D. Pa. 1998); Sang-Hoon Kim v. Monmouth Coll.,
726 A.2d 1017, 1018 (N.J. Super. Ch. Div. 1998).
These cases
have since become the minority view, but they have left
“employers to wonder when exactly it is appropriate to withhold
taxes from an award of back pay or settlement of an employmentrelated claim.”
Cifuentes v. Costco Wholesale Corp., 238 Cal.
App. 4th 65, 77, 189 Cal. Rptr. 3d 104, 112 (2015) (citations
omitted).
The Cifuentes v. Costco case is instructive.
There, a jury
awarded the former Costco employee judgment in the form of past
and future lost wages.
When Costco paid the judgment to the
plaintiff, it withheld payroll taxes ($116,150.84 out of the
$301,378.00 judgment).
The plaintiff argued that Costco should
have paid him the full amount by way of a 1099 form.
In directly rejecting Lisec v. United Airlines, Inc., the
court observed,
When Costco paid the judgment, it had two alternatives. It
could follow Lisec and risk liability to the IRS and other
taxing authorities for the amount of tax it failed to
withhold plus penalties. Or it could follow the prevailing
federal view and risk a judicial declaration that the
judgment is not satisfied. We conclude it chose correctly.
Costco's potential exposure for failing to withhold the
payroll taxes outweighed the inconvenience to Cifuentes of
seeking a refund for the excess withholding.
Cifuentes, 238 Cal. App. 4th at 77, 189 Cal. Rptr. 3d at 112.
Specifically relevant to the case here, the Cifuentes court
9
also noted, “the IRS's position is that judgment and settlement
payments for back and front pay (other than lost wages on
account of personal injury or sickness) are subject to income
and FICA tax withholding and are reportable as wages on a form
W–2, rather than as non-wage income on a form 1099–MISC.”
Id.
(citing Office of Chief Counsel IRS Memorandum, dated October
22, 2008, UILC: 61.00–00, 3101.00–00, 3111.00–00, 3402.00–00,
Income and Employment Tax Consequences and Proper Reporting of
Employment–Related Judgments and Settlements; 26 C.F.R. §§
31.3121(a)–1(b), (i), 31.3306(b)–1(i), and 31.3401(a)–1(a)(5).)
Based on the foregoing, defendant’s motion to enforce the
settlement has presented the Court with a dilemma.
On the one
hand, the Court finds that the parties entered into a valid
settlement agreement where the method of payment – by 1099 or W2 – was not an essential term of the contract.
On the other
hand, while the parties appear to have contemplated payment
pursuant to 1099, such a method appears contrary to law.
The Cifuentes court explained the federal and state tax
liabilities for employers who pay judgments that constitute
wages:
The IRC requires employers to collect income and FICA taxes
by withholding them from wages paid to employees. (26
U.S.C. §§ 3102(a), 3402(a)(1); Maxfield v. United States
Postal Service, (9th Cir. 1984) 752 F.2d 433, 434.)
California law similarly requires employers to withhold
state income and disability insurance taxes. (Unemp. Ins.
Code (UIC), §§ 13020, subd. (a)(1), 986.) An employer who
10
fails to withhold such taxes may be held liable for those
taxes plus penalties and interest. (26 U.S.C. §§ 3102(b),
3403, 6651; UIC, §§ 987, 1112, 1113, 1127, 13070.) The
failure to withhold taxes also is punishable as a crime.
(26 U.S.C. § 7202 [felony]; UIC, § 2118 [misdemeanor].) In
addition, even if the tax is later paid, an employer who
fails to withhold is subject to liability for penalties and
other statutory additions. (26 U.S.C. § 3402(d); see
Cheetham v. CSX Transportation,(M.D. Fla. 2012) 2012 WL
1424168, *8.)
Cifuentes, 238 Cal. App. 4th at 71-72, 189 Cal. Rptr. 3d at 108.
A Field Attorney Advice Memorandum from the IRS provides
similar guidance.
In LAFA 20133501F, the IRS clarified that if
all or part of a settlement is for back wages, front pay, or
severance pay, those amounts must be reported on Form W-2.
If
no allocation is made in the settlement for attorney fees, the
entire settlement amount may be reportable on Form W-2 and
subject to FITW and FICA taxes (including, if applicable, the
additional 0.9% Medicare tax).
If the settlement agreement
states that a portion of the settlement that would otherwise be
considered wages reportable on Form W-2 is for attorney fees,
that portion should be reported on a Form 1099-MISC issued to
the claimant.
See Key Issue 27A: Overview of Form 1099-MISC
Reporting Requirements, Payroll Tax Deskbook, 17th Ed. (November
2015), 20XX WL 11703343.
The LAFA also provides a helpful
example:
Example One – Separate Checks to Claimant and Attorney,
Clear Allocation
In this example, C1 agreed to waive all claims in return
11
for $X, payable in two lump sums of $X each. The agreement
specifically provided for attorney’s fees, payable to A1 in
two lump sums of $X and to A2 in two lump sums of $X. To
the extent the recovery is taxable to C1, the attorney’s
fees are includible in C1’s income and must be reported to
C1 by filing and furnishing an information return. Form
1099-MISC is the appropriate form to use in reporting the
attorney fee amounts to C1 when there is a clear allocation
of an amount as attorney’s fees, because such clearly
allocated amount is not wages subject to employment tax.
The employer must also report the portion of the settlement
that was paid directly to C1 by filing and furnishing a
Form W-2 reporting $X with C1 as payee for each year.
Finally, the employer must report the payments to the
attorneys by filing and furnishing two Forms 1099MISC with the two attorneys as payees for each year in the
amounts of $X and $X, respectively.
LAFA 20133501F, available at, https://www.irs.gov/pub/irslafa/20133501f.pdf.
Presuming that New Jersey state tax laws are similar to
California’s, 7 and understanding that federal tax laws are
uniform throughout the country, it is questionable whether
defendant’s position to pay plaintiff by Form 1099 is legally
advisable.
As a consequence, since the payment can only be made
by W-2, a process controlled by the defendant, no
indemnification provision can be maintained in the form
described.
In sum, the Court finds that the parties entered into an
7
See N.J.S.A. 54:8A-50, Liability of employer required to
withhold tax; special fund; right of action against employer;
N.J.S.A. 54:8A-51, Failure of employer to deduct and withhold
tax or to pay tax withheld.
12
enforceable settlement agreement which the Court will enforce.
In order to enforce the settlement, the Court will supply the
legally appropriate term of payment by W-2 8 into the settlement
agreement, and strike from the agreement the cited
indemnification provision to the extent it is inconsistent with
payment of the settlement proceeds by W-2.
See Mazzeo v.
Kartman, 560 A.2d 733, 737 (N.J. Super. App. Div. 1989)
(“[W]here the parties to a contract fail to specify a term that
is essential to a decision as to their relative rights and
responsibilities, the trial judge will attempt to supply that
term in order to effectuate the parties intent.”); New Jersey
Bank v. Palladino, 389 A.2d 454, 461 (N.J. 1978) (“Terms will be
implied in a contract where the parties must have intended them
because they are necessary to give business efficacy to the
contract as written. . . . . [W]hen the terms of an agreement
have more than one possible interpretation, by one of which the
agreement would be valid and by the other void or illegal, the
former will be preferred.”); Paley v. Barton Sav. & Loan Ass'n,
196 A.2d 682, 686 (N.J. Super. App. Div. 1964) cert. denied, 198
8
See Josifovich v. Secure Computing Corp., No. CIV. 07-5469FLW,
2009 WL 2390611, at *2 (D.N.J. July 31, 2009) (court determined
that payment by W-2 was the proper method of payment for the
portion of the settlement funds intended to compensate the
plaintiff for back and front pay).
13
A.2d 446 (N.J. 1964) (“The mere fact that certain terms of an
agreement may require construction by a court does not establish
that either of the parties to that agreement is without any
obligation thereunder. If it is at all possible, a court will
attach a sufficiently definite meaning to the terms of a bargain
to make it enforceable.”).
The parties are free to enter into any other indemnification
agreement consistent with this Opinion.
An appropriate Order will be entered.
Date: February 17, 2016
At Camden, New Jersey
s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.
14
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?