Sixth Circuit Finds Unpaid Wage Suit Was Really a Request for IRS Refund

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 (6^th 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.

 

Sixth Circuit: Tortious Interference Claim Based on Termination of ERISA Plan Is Not Completely Pre-Empted

This morning, the Sixth Circuit Court of Appeals reversed a defense judgment on a motion to dismiss the tortious interference with contract claim brought by executives covered by a terminated ERISA plan and remanded the case back to state court.  Gardner v. Heartland Industrial Partners, LP, No. 11-2327 (6^th Cir. 2013).  The supplemental executive retirement plan allegedly had been terminated in order to expedite the sale of the interest of a controlling shareholder to another entity.  The case had been removed to federal court on the grounds that the claim was completely pre-empted under §1132(a) of ERISA.  The Sixth Circuit, however, found the claim to be completely independent of the terms of the ERISA plan, and therefore, not covered under §1132’s complete pre-emption clause.  Therefore, not only should the claim not have been dismissed, but it should not have been removed to federal court in the first place.

According to the Complaint’s well-plead allegations, the plaintiff executives were covered by a Supplemental Executive Retirement Plan (SERP), which contained a change of control provision.  The individual defendants were Board members and/or executives of the employer and also owned an investment fund, which was a shareholder of the employer corporation and was also a defendant.  The investment fund agreed to sell its shares in the employer to another investment fund, which triggered the SERP’s Change of Control provision and created a $13M liability to Plaintiffs.  When the purchasing company found out about the $13M liability, it threatened to back out of the deal.   The individual defendants then convinced the employer’s Board to terminate the SERP – without notifying the Plaintiffs – and consummated the sale the following month. At least one of the individual defendants made $10M from the sale.   Plaintiffs were notified of the SERP termination the following month and then brought suit for tortious interference with contract.

Defendants asserted that Plaintiffs’ claims were completely pre-empted under §1132(a)(1)(B) of ERISA, removed the case to federal court and moved to dismiss.  The District Court granted the Motion and this appeal followed.  The Sixth Circuit concluded that the tortious interference claim was not completely pre-empted because the merit of the claim was independent of the terms of the SERP.

The issue here is whether Plaintiffs’ state-law “tortious interference with contractual relations” claim is within the scope of § 1132(a)(1)(B) [the complete pre-emption provision] for purposes of this rule. A claim is within the scope of § 1132(a)(1)(B) for that purpose if two requirements are met: (1) the plaintiff complains about the denial of benefits to which he is entitled “only because of the terms of an ERISA-regulated employee benefit plan”; and (2) the plaintiff does not allege the violation of any “legal duty (state or federal) independent of ERISA or the plan terms[.]” Id. at 210.

Plaintiffs’ tortious interference claim was independent from the SERP because the state-law duty was not dependent upon the terms of the SERP and the damages would be paid, if at all, by Defendants and not by the SERP or the employer. 

Defendants’ duty not to interfere with Plaintiffs’ SERP agreement with Metaldyne arises under Michigan tort law, not the terms of the SERP itself. And more to the point—unlike the state-law duties in Arditi and Davila, respectively—Defendants’ duty is not derived from, or conditioned upon, the terms of the SERP.  Nobody needs to interpret the plan to determine whether that duty exists. Thus, Plaintiffs’ claim is based upon a duty that is “independent of ERISA [and] the plan terms[.]” Davila, 542 U.S. at 210.

The Court rejected the defense argument that a tortious interference claim required proof of a breach, which in turn, required an interpretation of the terms of the SERP:

But the issue is immaterial here, because under Michigan law one party’s complete repudiation of a contract is enough to establish breach.  . . .  And Plaintiffs have alleged facts amounting to repudiation here. See Complaint ¶ 41 (“on December 18, 2006, without stating a reason, or giving plaintiffs any opportunity to be heard, [the Metaldyne Board] declared the Amended SERP invalid”).

A determination of Defendants’ liability therefore does not require any interpretation of the SERP’s terms. It is true, of course, that those terms would likely be relevant in measuring the amount of Plaintiffs’ damages. As shown above, however, that is beside the point for purposes of Davila’s second prong. Moreover, in this case, as in Stevenson, any damages “would be payable from [Defendants’] assets, not from the” plan itself. 609 F.3d at 61. Finally, Heartland’s remaining arguments pertain less to preemption under § 1132(a)(1)(B) than they do to whether Plaintiffs’ claims are [expressly] preempted under § 1144(a)—which is an issue upon which we take no position here.

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.

Ohio Appellate Court: National Bank Act Pre-empts Ohio Discrimination Claim, But Question Exists Whether Board Properly Terminated Plaintiff under NBA

Late last month, the Summit County Court of Appeals held that the National Bank Act pre-empted the state law gender discriminatory treatment claims of a discharged business banking officer, but not her state law retaliatory discharge claims. Boesch v. Champaign National Bank, No. 2008-Ohio-3282 (6/30/08). While the undisputed evidence showed that the plaintiff was a bank “officer” who was appointed by the bank’s board of directors, there was an evidentiary question as to whether she was discharged by the bank’s president or the board because of the manner of preparation and presentation of the board’s minutes and an amendment concerning her termination.

The Court recognized that the power granted to banks by the National Bank Act “to appoint and dismiss officers at ‘pleasure’ conflicts with the Ohio statutory provisions precluding employment discrimination and retaliation.” While the National Bank Act, 12 U.S.C. § 24 (Fifth), gives national banks the power: "[t]o elect or appoint directors, and by its board of directors to appoint a president, vice president, cashier, and other officers, define their duties, require bonds of them and fix the penalty thereof, dismiss such officers or any of them at pleasure, and appoint others to fill their places, " the Ohio Civil Rights Act State Act, O.R.C. § 4112.02(A), in contrast provides that “ it is an unlawful discriminatory practice: [f]or any employer, because of the race, color, religion, sex, national origin, disability, age, or ancestry of any person, to discharge without just cause, to refuse to hire, or otherwise to discriminate against that person with respect to hire, tenure, terms, conditions, or privileges of employment, or any matter directly or indirectly related to employment.” Moreover, “[w]ith respect to retaliation, state law provides that it is an unlawful discriminatory practice: [f]or any person to discriminate in any manner against any other person because that person has opposed any unlawful discriminatory practice defined in this section or because that person has made a charge, testified, assisted, or participated in any manner in any investigation, proceeding, or hearing under sections 4112.01 to 4112.07 of the Revised Code."

The court was faced with deciding whether the National Bank Act preempted state law under the constitution’s supremacy clause and recognized that the Sixth Circuit regularly recognized this preemption. Because the plaintiff had been properly hired by the bank president with authority from the bank’s board of directors and the decision was properly ratified by the bank’s board, the court found that the evidence showed that she was a bank “officer” covered by the National Banking Act. Therefore, the court concluded that her state law discrimination claims were pre-empted by federal law.

However, the Court also concluded that there was an evidentiary question as to whether her discharge was authorized and/or ratified by the bank’s board of directors. The bank’s president discharged the plaintiff and during litigation submitted an affidavit asserting “that the bank's board of directors terminated [plaintiff] and that such action is reflected in an amendment to the minutes of the meeting in which the board made that decision.” The plaintiff questioned the authenticity of the board minutes because “the amendment was undated and dealt with no other bank business . . . [and the bank] did not provide the original minutes of the board's meeting. She alleges that the amendment appears to have been created for litigation purposes and concludes that there is a question as to whether the ratification was "prompt" and appropriate under the NBA.” The Court agreed that these were valid evidentiary issues for a jury to resolve. Moreover, the court was “unable to determine from the record whether the board had delegated its authority to Lamping to terminate Boesch. . . . [raising] the issue of whether [plaintiff’s] termination was accomplished by the board of directors, or whether it was an individual action” by the bank president.

Insomniacs can read the full decision at http://www.sconet.state.oh.us/rod/docs/pdf/9/2008/2008-ohio-3282.pdf.

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.