Settlement Agreement’s Silence About Tax Treatment Leaves Parties to Fend for Themselves

On Monday, the Sixth Circuit Court of Appeals in Cincinnati issued a decision about whether a bank breached a settlement agreement involving a home mortgage in Blacklick.  McClusky v. Century Bank, FSB, No. 14-3419 (6^th Cir. 1-26-15).  In that case, the parties settled their case with the forgiveness of a disputed amount of the debt and the trial court entered the judgment entry merely noting that the dispute had been resolved.  The Bank later issued a 1099 tax form to the plaintiff for the amount of the cancelled debt, raising his taxes by almost $70K.  He then sued for breach of the settlement agreement, which said nothing about the tax treatment of the cancelled debt.   The Court held that because the settlement agreement and judgment entry did not put any limitations on how the Bank could treat the cancelled debt for tax purposes, there was nothing limiting the Bank from issuing the 1099.  Accordingly, when employment disputes are resolved without an agreement about the tax treatment of any settlement payments, the employer would similarly be free to issue appropriate tax forms based on its own reasonable characterization of the payments.

As noted by the Court:

 The Settlement Order says nothing about how each party would treat the transaction memorialized in the Settlement Order for tax purposes nor about how (or whether) each party would report the transaction to the IRS. Given the complete absence of any reference to tax reporting issues, the Settlement Order cannot be read as precluding Century Bank from issuing the McClusky 1099. Indeed, it would violate Ohio’s fundamental rules of contract interpretation to read into the Settlement Order a limitation on Century Bank’s conduct that the order simply does not contain.

                . . .

The absence of any reference to tax treatment/reporting issues in the Settlement Order is especially significant because it is common practice for parties to address these matters in settlement agreements when the parties have, in fact, agreed upon them. Indeed, one treatise on Ohio law advises Ohio attorneys drafting a settlement agreement to specify the tax  consequences that the parties intend to govern the agreement.

 In reaching this conclusion, the Court considered cases from other jurisdictions where the parties had agreed how to characterize the payments, to keep the payments confidential and even to not subject them to any tax withholding.  Nonetheless, the courts refused to find a breach of contract when the payor issued 1099 tax forms to the payee in the absence of a specific contractual promise to not issue such a tax form.

This being said, the Court took no position on whether the cancelled debt constituted taxable income and did not endorse permitting a payor (such as an employer) to make tax withholdings in the absence of a contractual provision entitling it to do so.

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.

No Breach of Settlement Agreement by Employer When Employee Failed to Properly Direct References to Specified Individual

The Trumball County Court of Appeals this month affirmed summary judgment in favor of an employer on a claim by a former employee that the employer breached their settlement agreement concerning job references.   Baumgartner v. AIM Leasing, 2013-Ohio-883.   In that case, the parties’ settlement agreement – as many do --  provided for a certain job reference (which omitted certain driving accidents by the employee in the course of his employment) if he directed his future employers to contact a particular Human Resources employee.   When applying for jobs with other trucking and delivery companies, the plaintiff-employee failed to specify on his job applications (or on the job reference waiver forms) who the potential employer should contact at his former employer.   Consequently, these prospective employers did not receive the agreed-upon job reference information pursuant to the settlement agreement.  One of these employers hired the plaintiff-employee anyway, but fired him after receiving reference information (which disclosed his preventable and unpreventable traffic accidents) that was inconsistent with the information he provided on his job application.  The Court found that the defendant-employer was not required to provide the agreed-upon reference information unless the prospective employer contacted the particular HR employee as agreed in the settlement agreement.   Therefore, there was no breach of the settlement agreement. 

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.

Mansfield Company Pays $188K to Settle EEOC Sex Discrimination Lawsuit

Yesterday, the EEOC announced that it had settled a lawsuit against a Central Ohio company for $188K which involved retaliation and sex and wage discrimination. In the lawsuit, the EEOC alleged that the defendant employer hired an experienced female drafter to prepare drawings and sketches for batteries and engines, but paid a higher salary to a similarly qualified male engineer hired a few months after her to perform the same tasks. When the female engineer learned of the salary disparity, she complained to the human resources manager and was subsequently fired – allegedly in retaliation for complaining about the discrimination. The EEOC ultimately filed suit on her behalf in 2010, alleging violations of Title VII and the Equal Pay Act.

In addition to monetary damages for the female engineer, the EEOC obtained a two-year consent decree which requires training for the defendant employer's human resources personnel and employees at the Hyundai Ideal Electric Company's home office in Mansfield, Ohio and posting of anti-discrimination notices.

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.