Cifuentes v. Costco Wholesale Corp.

• Decision Date: 26 June 2015
• Docket Number: 2d Civil No. B247930
• Citation: 238 Cal.App.4th 65,189 Cal.Rptr.3d 104
• Parties: Carlos CIFUENTES, Plaintiff and Respondent, v. COSTCO WHOLESALE CORPORATION, Defendant and Appellant.
• Court: California Court of Appeals Court of Appeals

238 Cal.App.4th 65

189 Cal.Rptr.3d 104

Carlos CIFUENTES, Plaintiff and Respondent

v.COSTCO WHOLESALE CORPORATION, Defendant and Appellant.

2d Civil No. B247930

Court of Appeal, Second District, Division 3, California.

Filed June 26, 2015

Stradling Yocca Carlson & Rauth, P.C., Los Angeles, Jeffrey A. Dinkin, Santa Barbara, Shahzad A. Malik, Newport Beach, Gannon E. Johnson and Ryan C. Gaglio, Newport Beach, for Defendant and Appellant.

Edward Lowenschuss ; Diane M. Matsinger, Santa Barbara, for Plaintiff and Respondent.

OPINION

PERREN, J.^*

Carlos Cifuentes won a judgment for lost wages against his former employer, Costco Wholesale Corporation (Costco). Costco withheld federal and state payroll taxes from the award. Cifuentes claimed the judgment was not satisfied, citing the decision in Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500, 1507, 11 Cal.Rptr.2d 689 (Lisec ), that an employer is not required to withhold payroll taxes from an award of lost wages to a former employee. Believing it was bound by Lisec, the trial court ruled the withholding was improper and denied Costco's motion for acknowledgment of satisfaction of the judgment. We conclude this was error.

In the 23 years since Lisec, the Internal Revenue Service (IRS) and the vast majority of federal appellate courts have broadly interpreted the applicable Internal Revenue Code (IRC) provisions as requiring an employer to withhold payroll taxes for all “wages” arising from the employer-employee relationship, even after that relationship has terminated. Persuaded by these authorities, we adopt this prevailing view and conclude Costco properly withheld the payroll taxes. The judgment having been satisfied, we reverse the trial court's order and remand with instructions.

FACTUAL AND PROCEDURAL BACKGROUND

While employed by Costco, Cifuentes observed a front-end manager hugging a female employee outside the store. He reported the incident to a supervisor. Six months later, the front-end manager reported seeing Cifuentes surreptitiously sip three ounces of a beverage sold by Costco. Costco terminated Cifuentes' employment for violating its policy against “grazing,” i.e., consuming food merchandise without payment.

Cifuentes filed a wrongful termination complaint alleging contract claims against Costco and tort claims against Costco and three of its managers. The trial court summarily adjudicated the tort claims in the defendants' favor.

Cifuentes prevailed at trial on his breach of contract claim. The jury awarded him $28,125 in “past wage loss” and $273,253 in “future wage loss.” With costs and interest, the judgment totaled $325,692.07. Cifuentes appealed the portion of the judgment summarily adjudicating the tort claims in favor of Costco and its managers. We affirmed. (Cifuentes v. Costco Wholesale Corp. (July 10, 2012, B231684) 2012 WL 2814395 [nonpub. opn.].)

When Costco paid the judgment, it withheld $116,150.84 in payroll taxes from the $301,378 attributed to lost wages. The taxes included Federal Insurance ContributionS Act (FICA; 26 U.S.C. § 3101 et seq. ) contributions, federal and state income taxes and state disability insurance. Maintaining it was required by law to withhold the taxes, Costco informed Cifuentes it had fully satisfied the judgment.

Initially, Cifuentes claimed that postjudgment interest of $274.53 was still owed. Costco disputed this, but paid the $274.53 and demanded that Cifuentes acknowledge full satisfaction of the judgment. Cifuentes again declined, pointing to the Sixth Appellate District's decision in Lisec, supra, 10 Cal.App.4th at page 1507, 11 Cal.Rptr.2d 689, that an award of lost wages to a former employee is not subject to withholding. He asserted Costco should have paid him the full judgment amount, issued a 1099 tax form for the lost wages and allowed him to pay any taxes due directly to the taxing authorities. Cifuentes filed an acknowledgment of partial satisfaction in the amount of $209,898.15.

In a series of letters, the parties disputed whether Lisec was controlling. Costco cited a number of contrary IRS and federal case authorities and highlighted the admonishment in a respected California practice guide that “[e]mployers should not rely on Lisec, supra. The opinion does not cite or mention contrary federal cases on what is basically an issue of federal tax law.” (Chin et al., Cal. Practice Guide: Employment Litigation (The Rutter Group 2014) ¶ 17:897, p. 17-169 (Cal. Rutter Employment Guide); accord, Rosen et al., Cal. Practice Guide: Federal Employment Litigation (The Rutter Group 2015) ¶ 11:897, p. 11-110 (Fed. Rutter Employment Guide).) Costco further noted that Cifuentes' own financial expert, Pamela Allman, testified that any compensation for “lost past or future wages” would be “subject to payroll taxes,” including “Social Security, Medicare, [and s]tate disability insurance.”

The impasse remained until Cifuentes received $69,078 in tax refunds from the IRS and California Franchise Tax Board. Costco again demanded he acknowledge satisfaction of the judgment. Cifuentes refused, claiming he was still owed $23,764.95 plus interest. Costco moved for an acknowledgement of satisfaction of judgment pursuant to Code of Civil Procedure section 724.050¹ and requested $20,060 in attorney fees.

Citing a number of federal appellate decisions, IRS authorities and treatises, Costco argued Lisec was wrongly decided and that prevailing law supported the withholding. The trial court acknowledged that “[m]uch of what Costco argues is compelling,” and stated that “[i]f the court were to rule on this issue in the first instance, it might be inclined to rule in Costco's favor.” Suggesting “the issue may need to be decided by a higher court,” the court determined it had no choice but to follow Lisec as the only California appellate decision on point and consequently denied the motion. It found Costco still owes Cifuentes the $9,975.37 withheld for FICA and state disability insurance, plus interest on that sum and “possibly” on the income tax withholdings that eventually were refunded. The court questioned whether interest is due on the amounts withheld for income taxes actually owed, but concluded “[i]n any event, the judgment has not been fully satisfied.” It denied Cifuentes' request for $2,880 in attorney fees based on his failure to submit a declaration providing evidence of those fees. Costco appeals.

DISCUSSION

The principal issue on appeal is whether an employer is required to withhold payroll taxes when paying a judgment to a former employee for “lost past wages” (backpay) and “lost future wages” (front pay). Backpay is the amount of wages the employee would have earned from the date of termination up to the time of the court award or settlement but for the employer's misconduct. (Noel v. New York State Office of Mental Health Central New York Psychiatric Center (2d Cir. 2012) 697 F.3d 209, 213 (Noel ).) Front pay is “money awarded for lost compensation during the period between judgment and reinstatement or in lieu of reinstatement.” (Pollard v. E.I. du Pont de Nemours & Co. (2001) 532 U.S. 843, 846, 121 S.Ct. 1946, 150 L.Ed.2d 62.)

Costco contends the award of backpay and front pay to Cifuentes constituted “wages” under the applicable federal and state tax laws and, as such, was subject to mandatory withholding. It claims that if it had paid the judgment without deducting the taxes, it could have been held personally liable for them. Cifuentes responds that under Lisec, supra, 10 Cal.App.4th at page 1507, 11 Cal.Rptr.2d 689, the judgment must be satisfied in the amount as written. He concedes the award was taxable to him as income, but maintains the withholding was unlawful because the award was not remuneration for services performed by him on Costco's behalf.

The trial court determined it was bound by Lisec under principles of stare decisis. (See Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455, 20 Cal.Rptr. 321, 369 P.2d 937.) Although we review the decision of a sister court with respect, if we disagree with its conclusion, we are not so bound. (Greyhound Lines, Inc. v. County of Santa Clara (1986) 187 Cal.App.3d 480, 485, 231 Cal.Rptr. 702 ; see In re Jaime P. (2006) 40 Cal.4th 128, 133, 51 Cal.Rptr.3d 430, 146 P.3d 965 [“[R]eexamination of precedent may become necessary when subsequent developments indicate an earlier decision was unsound, or has become ripe for reconsideration.”].) Our review of current IRS and federal decisional authorities persuades us that an employer who fails to withhold payroll taxes from an award of back or front pay to a former employee exposes itself to penalties and personal liability for those taxes. We therefore decline to follow Lisec and adopt instead the prevailing federal view.

Standard of Review

We review de novo the trial court's interpretation of the meaning and scope of federal statutory law. (Kanter v. Warner–Lambert Co. (2002) 99 Cal.App.4th 780, 789, 122 Cal.Rptr.2d 72.) If the United States Supreme Court has not provided guidance on an issue of federal law and there is a division of opinion or conflict among the federal courts, state courts may make an independent determination of federal law. (Alicia T. v. County of Los Angeles (1990) 222 Cal.App.3d 869, 879, 271 Cal.Rptr. 513.) The decisions of the federal appellate and district courts are accorded great weight, though they are not binding. (Ibid. )

Pre-1993 Interpretation of Applicable Tax Laws

The IRC requires employers to collect income and FICA taxes by withholding them from wages paid to employees. (26 U.S.C. §§ 3102(a), 3402(a)(1) ; Maxfield v. United States Postal Service (9th Cir. 1984) 752 F.2d 433, 434.) California law similarly requires employers to withhold state income and disability insurance taxes. (Unemp. Ins. Code, §§ 13020, subd. (a)(1), 986.) An employer who fails to withhold such taxes may be held liable for those taxes plus penalties and interest. (26 U.S.C. §§ 3102(b), 3403, 6651 ;...