Copper distributor's settlement proceeds not subject to federal withholding, says magistrate judge

By Nicholas Malfitano | Jul 19, 2016

PHILADELPHIA – A federal judge ruled July 14 that a Reading-based copper distributor is ordered to pay the full proceeds of a settlement to a plaintiff and his counsel, without deductions made for payroll taxes.

U.S. Magistrate Judge Henry S. Perkin decreed Cambridge-Lee Industries would be required to provide funds in that specific format to settle a lawsuit brought by Vincent Gunter under the Family and Medical Leave Act (FMLA), thereby ending a dispute between the parties as to how the proceeds would be reported to the Internal Revenue Service (IRS).

“The plaintiff’s position is that the settlement proceeds are not wages and therefore not subject to withholding or reporting to the IRS with a Form W-2, but should be reported to the IRS on Form 1099 without withholding,” Perkin said. “In support of his position, the plaintiff cites the case of Churchill v. Star Enters, decided by our colleague, the Honorable Harvey Bartle, III.”

Perkin also outlined the defense’s position.

“The defendant, on the other hand, asserts that the settlement proceeds constitute wages to the plaintiff which must be reported to the IRS on Form W-2, subject to withholding of taxes and other payroll charges,” Perkin added. “The defendant contends that the IRS’s position is that employment taxes should be withheld from any settlement funds paid directly to the plaintiff relying, among other cases, on Cheetham v. CSX Transportation.”

Perkin noted the defense explained the U.S. District Court for the Eastern District of Pennsylvania was not bound by the decisions in Churchill or Cheetham, since they were non-precedential decisions made in other courts, but recapped the background on those separate litigations.

“In reviewing the rulings and regulation as well as the FMLA statute, Judge Bartle noted that the regulation and the FMLA statute specifically required the performance of services in order for the payment to constitute wages for withholding purposes. As a result, he held that no withholding was mandated under either federal or state law,” Perkin said, of the decision in Churchill.

“In Cheetham, Judge [Thomas E.] Morris, finding no appellate authority, invited the IRS to file an amicus curiae brief requesting its position with regard to FMLA awards constituting wages subject to withholding of taxes. In that case, the IRS took the position that the FMLA award constituted wages. Judge Morris distinguished Churchill and Carr on the basis that the plaintiff was not suing any individual supervisors, and it was not in dispute that the amount of damages awarded directly reflected the amount of wages lost by the plaintiff as she acknowledged at trial,” Perkin stated.

Perkin decided the Churchill and Carr cases, given their references to the specific language contained in the FMLA, were most persuasive in this case – and therefore, decided no deductions were necessary from the settlement proceeds negotiated between Gunter and Cambridge-Lee Industries.

“Although the defendant argues that it ‘would be liable, both civilly and criminally, for failing to withhold the applicable taxes’ if it pays the plaintiff’s portion of the settlement proceeds with a Form 1099-MISC, it fails to acknowledge that none of the cases cited by either party are binding precedent on this Court,” Perkin said.

“As such, after review of the two competing lines of cases regarding withholding, the Court finds Churchill and Carr and their emphasis on the unique language of the FMLA persuasive, distinguishing it from other employment statutes to be persuasive and will follow the holdings of those cases. We, therefore, hold that no withholding is required for the proceeds of the settlement in this case payable to the plaintiff,” Perkin concluded.

The plaintiff is represented by Samuel A. Dion of Dion & Goldberger, in Philadelphia.

The defendant is represented by Ronald L. Williams, J. Benjamin Nevius and Jennifer J. Hanlin, all of Fox Rothschild in Exton.

U.S. District Court for the Eastern District of Pennsylvania case 5:14-cv-02925

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at

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