Many states like Ohio have their own wage payment statutes which require employers to pay employees all of their wages by a particular date unless the employee has authorized certain deductions or unless deductions are required by law (such as payroll taxes). When employees are not paid (at all or on time), they not only sue for breach of contract, but also for violation of the wage payment statute. However, last month, the Sixth Circuit found one such lawsuit for unpaid wages was really a request for an IRS refund because the employer had purportedly deducted not only the employee’s share of payroll taxes from her wages, but also its share of the payroll taxes. Berera v. Mesa Medical Group, PLLC., No. 14-5054 (6th Cir. 2-19-15). According to the Sixth Circuit, the plaintiff’s only remedy for these improper payroll deductions was to seek a refund from the IRS instead of suing her employer under the state wage payment statute for wrongfully deducting amounts from her wages. Therefore, it dismissed her suit for unpaid wages and directed her to seek repayment only from the IRS.
According to the Court’s opinion, the plaintiff discovered
after her employment ended that her W-2 tax form did not accurately reflect the
wages she had earned. A few months
later, she filed a class action in state court and alleged under the state wage
payment law that that the employer had forced her and her co-workers to pay the
employer’s share of payroll taxes and caused them to receive less money than
they had earned as wages. After learning that the basis of the lawsuit
concerned wrongfully withheld payroll taxes, the employer removed the case to
federal court and moved to dismiss. The trial
court found that the allegations actually stated a claim for a tax refund, even
if the employer failed to remit the wrongfully withheld payroll taxes to the
IRS, because the amounts were deducted as a tax. The Sixth Circuit affirmed.
Section 7422(a) of the Internal Revenue Code governs
tax-refund lawsuits. It provides:
No suit or proceeding shall be maintained in any court for
the recovery of any internal revenue tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has been
duly filed with the [IRS], according to the provisions of law in that regard,
and the regulations of the [IRS] established in pursuance thereof.
26 U.S.C. § 7422(a).
The exhaustion-of-remedies requirement in § 7422(a) is
mandatory. Under § 7422(a), a taxpayer is barred from bringing an action in
federal court for a refund of any internal revenue tax or sum erroneously,
illegally, or wrongfully assessed “until a claim for refund . . . has been duly
filed with the [IRS].”
Both the Third and Seventh Circuits have held that employees
cannot sue their employers for wrongfully withheld payroll taxes, but must
instead, seek a refund from the IRS. Those courts concluded that the federal tax
laws completely pre-empted any inconsistent state law remedy. The Sixth Circuit declined to find complete
pre-emption, but agreed that the plaintiff must exhaust her administrative remedies
before pursuing litigation.
The Court rejected the plaintiff’s argument that the IRS
would not be able to provide her with a remedy if the employer had failed to
remit the wrongfully withheld payroll taxes.
Instead, the Court agreed with the other Circuits that if the employer
had failed to remit the wrongfully withheld taxes to the IRS, the IRS was
capable of collecting it.
NOTICE: This summary is designed
merely to inform and alert you of recent legal developments. It does not
constitute legal advice and does not apply to any particular situation because
different facts could lead to different results. Information here can change or
be amended without notice. Readers should not act upon this information without
legal advice. If you have any questions about anything you have read, you
should consult with or retain an employment attorney.
