Arkansas Dept. Health Human Serv. V. Storey

• Decision Date: 13 December 2007
• Docket Number: No. 07-525.,07-525.
• Citation: 269 S.W.3d 803,372 Ark. 23
• Parties: ARKANSAS DEPARTMENT OF HEALTH AND HUMAN SERVICES and Booneville Human Development Center, Appellants, v. Betty STOREY, Appellee.
• Court: Arkansas Supreme Court

269 S.W.3d 803

372 Ark. 23

ARKANSAS DEPARTMENT OF HEALTH AND HUMAN SERVICES and Booneville Human Development Center, Appellants, v. Betty STOREY, Appellee.

No. 07-525.

Supreme Court of Arkansas.

December 13, 2007.

Arkansas Department of Human Services, Office of Chief Counsel, by: James E. Brader, Little Rock, AR, for appellants.

Ledbetter, Cogbill, Arnold & Harrison, L.L.P., by: Rebecca D. Hattabaugh, Fort Smith, AR, R. Chris Parks, and Victor L. Crowell, for appellee.

DONALD L. CORBIN, Justice.

This is an appeal of a postjudgment order issued by the Logan County Circuit Court. The order found that Appellants, Arkansas Department of Health and Human Services (ADHHS) and Booneville Human Development Center (BHDC), would not be released from judgments entered on August 1 and October 24, 2006,¹ and that the judgments would not be deemed satisfied until the additional monies withheld as taxes, plus interest, were paid to Appellee Betty Storey. This case was certified to this court by the Arkansas Court of Appeals for a determination of whether the circuit court erred in refusing to allow Appellants to withhold taxes from the judgments; hence, our jurisdiction is pursuant to Ark. Sup.Ct. R. 1-2(b)(1), (4), and (6).

On April 16, 2004, Appellee was terminated from her employment as a social worker with BHDC, a state-owned residential facility for individuals with developmental disabilities. Following her termination, Appellee filed a lawsuit against Appellants asserting, in part, that they had violated the Arkansas Whistle-Blower Act, Ark.Code Ann. § 21-1-601 et seq, by terminating her in retaliation for reporting suspected improprieties.

Following a three-day trial on July 10, 12, and 13, 2006, the jury returned a verdict in favor of Appellee on her whistle-blower claim, and awarded her $75,000.00 for "lost wages, benefits, and other remuneration." An order to this effect was entered on August 1, 2006. Subsequent to trial, Appellee filed a motion for front pay in lieu of reinstatement. The circuit court granted this motion, and, in an October 24, 2006 order, awarded Appellee $40,000.00. Neither of these judgments were appealed.

Following these judgments, Appellants sent payments of $38,638.34 and $22,305.44 to Appellee. However, these amounts were less than what was awarded because Appellants withheld $36,361.66 of the $75,000.00 award and $17,694.56 of the $40,000.00 award in federal and state income taxes, including Federal Insurance Contribution Act (FICA) taxes. On November 13, 2006, Appellee, through her attorney, sent a letter to the circuit court informing it of the situation, and arguing that it was not appropriate for Appellants to withhold any taxes from the judgments. In addition to setting forth legal arguments, Appellee requested that the court set this matter for a hearing.

A hearing on the issue of withholding was held on December 5, 2006. After hearing arguments from both parties, which included Appellants' oral motion for satisfaction of judgment, the circuit court found in Appellee's favor. In a December 13, 2006 order, the circuit court ruled that Appellants would not be released and the judgments would not be deemed satisfied until the withheld monies, plus interest, were paid to Appellee. As support for this ruling, the circuit court found that (1) "at the time Judgment was awarded, [Appellee] was not employed by BHDC, the [Appellants] were not her employer, and she had not provided any services to them"; and (2) Appellants "have failed to submit authority to this Court establishing that they were authorized or obligated to withhold the sums which they withheld from the amount of the Judgment awards to [Appellee]." This appeal followed.

On appeal, Appellants raise two issues for reversal: the circuit court (1) erred in finding that the entire amounts of back and front pay awards in an Arkansas Whistle-Blower Act case were not "wages" subject to income tax withholding, and (2) abused its discretion by refusing to release Appellants from judgment.² Prior to addressing these arguments, however, it is necessary to examine the threshold issue of jurisdiction.

Appellee has questioned whether this court has jurisdiction to hear this case. She argues that, under Ark. R.App. P.-Civ. 4, Appellants were required to file a notice of appeal within thirty days of entry of both the August 1 and October 24 orders. Appellants did not do this. Consequently, according to Appellee, Appellants are now attempting to appeal the circuit court's denial of their oral motion to release them from the judgments because they were purportedly satisfied, which it cannot do. Specifically, Appellee argues that the postjudgment order is interlocutory in nature such that it is not an appealable order under Ark. R.App. P.-Civ. 2.³ Upon review, the postjudgment order is an appealable order. Appellants are not contesting the judgments themselves; rather, they are challenging the circuit court's postjudgment order finding that their payment, which withheld taxes, did not satisfy the judgments. Thus, the order is appealable because it, in effect, determined the action of this case. See Ark. R.App. P.-Civ. 2(a)(2).

Because we have jurisdiction to hear this appeal, we will now address the issues raised by Appellants. Their first argument asks the question of whether the entire amounts of back and front pay awards in an Arkansas Whistle-Blower Act case are "wages" subject to income tax withholding. In framing their argument, Appellants first direct the court to determine whether the full amounts of the awards are gross income, and then to examine the issue of whether the awards are "wages" subject to income tax withholding. Appellee concedes that the awards may, at some point, be taxable, but argues that Appellants had no authority to withhold taxes from the back and front pay awards. Thus, the issue is not whether the awards are taxable but whether Appellants, as a former employer, had any obligation or authority to withhold income tax from payments intended to satisfy final judgments entered in a wrongful-termination case.⁴

Federal law, under the Internal Revenue Code, requires that an employer deduct and withhold from an employee's wages federal income tax on behalf of the employee, except in certain circumstances not relevant here. See 26 U.S.C. § 3402(a) (2000). In addition, employers are also required to withhold employee taxes that fund, amongst other things, disability insurance (Social Security) and Medicare programs pursuant to FICA. See 26 U.S.C. §§ 3101-3102 (2000 & Supp.2004). Like federal income taxes, FICA taxes are based upon and withheld from employees' "wages." See 26 U.S.C. 3102(a) (Supp. 2004). The Internal Revenue Code, apart from listed exclusions that do not apply here, defines "wages" as "all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash[.]" 26 U.S.C. § 3401(a) (2000).⁵ Similarly, aside from listed exclusions not applicable here, FICA defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash[.]" 26 U.S.C. § 3121(a) (2000).⁶

Similarly, the Arkansas Income Tax Act of 1929 provides that "[e]very employer making payments of wages to employees shall deduct and withhold from their wages an amount determined from withholding tables promulgated by the director and furnished to the employer." Ark.Code Ann. § 26-51-905(a)(1) (Supp.2003). "[W]ages" are "remuneration in cash or other form for services performed by an employee for an employer[.]" Ark.Code Ann. § 26-51-902(13) (Supp.2005).⁷

In the present case, the circuit court found that at the time the judgments were awarded, Appellee was not employed by Appellants and she had not provided any services to them. Furthermore, the circuit court found that Appellants failed to submit authority establishing that they were required or authorized to withhold taxes from the judgments. Appellants claim that the circuit court's decision is contrary to prevailing federal tax law and should be reversed by this court. Specifically, Appellants argue that they were required, under both federal and state law, to withhold portions of the back pay and the front pay judgments because they constituted "wages."

The issue of whether a defendant was required to withhold taxes when satisfying a judgment awarded in a wrongful-termination case is an issue of first impression in Arkansas. However, other jurisdictions have addressed this issue. In examining this issue, the focus is on whether an employer-employee relationship existed, such that the award constituted "wages," thus triggering the withholding requirement. See, e.g., Longstreth v. Copple, 101 F.Supp.2d 776, 778 (N.D.Iowa 2000) (explaining that "it is important to demonstrate an employer-employee relationship in order to label an award as wages for purposes of triggering the withholding requirement"); Newhouse v. McCormick & Co., 157 F.3d 582, 585 (8th Cir.1998) (explaining that the plain language of the Internal Revenue Code "indicates the importance of demonstrating an employer-employee relationship in order to label an award as wages for purposes of triggering the withholding requirement"). If an employer-employee relationship does not exist during the time period for which the judgment is awarded, then the award does not constitute "wages," and the income tax withholding requirement is not applicable. See Sang-Hoon Kim v. Monmouth College, 320 N.J.Super. 157, 160, 726 A.2d 1017, 1019 (1998) (explaining that when no employer-employee relationship existed, because the plaintiff had been terminated and had never been reinstated, a "lost income" award did not constitute "wages" subject to withholding under the Internal Revenue Code); Newhouse, 157 F.3d 582,...