Emerick v. Teaneck Bd. of Educ.

Citation534 A.2d 1044,221 N.J.Super. 456
Parties, 43 Ed. Law Rep. 1045 John EMERICK, Plaintiff-Respondent, v. TEANECK BOARD OF EDUCATION, Defendant-Appellant.
Decision Date09 December 1987
CourtNew Jersey Superior Court – Appellate Division

Greenwood & Sayovitz, West Orange, for appellant (Robert H. Greenwood, on brief).

Bucceri & Pincus, Clifton, for respondent (Sheldon H. Pincus, of counsel; T.J. Baldwin-LeClair, on brief).

Before Judges DREIER and BAIME.

The opinion of the court was delivered by

DREIER, J.A.D.

Defendant appeals from a decision of Judge Huot in the Chancery Division directing defendant Teaneck Board of Education (Board) to comply with a settlement agreement and pay plaintiff the full agreed amount of $38,350, without deduction for withholding taxes or social security payments. The court also ordered that defendant pay interest on this sum from December 31, 1985 until the date of payment.

The background of the parties' initial dispute is of little moment. It is sufficient to note that the Board served tenure charges on plaintiff in August 1985 alleging excessive absences. Plaintiff had contended that the absences were caused by a series of illnesses, accidents and operations during the course of six school years. The Board, however, asserted that the absences demonstrated chronic absenteeism, incapacity to perform plaintiff's duties, and conduct unbecoming a teacher, all of which tended to disrupt the "educational process." The Board notified plaintiff that it would consider the charges at a public meeting after which it would determine whether to submit the matter to the Commissioner of Education for a hearing. Plaintiff's counsel then notified the Board that he would pursue counter-actions and counterclaims for

the torts of handicap discrimination, interference with prospective economic advantage, intentional infliction of emotional distress, malicious prosecution and/or abuse of process, and defamation of character and professional reputation.

Before any further action was taken, the parties entered into settlement discussions which culminated in a settlement agreement dated October 23, 1985, the purpose of which was stated to be "an amicable resolution of all anticipated litigation." The key portions of the agreement called for plaintiff's resignation as of December 31, 1985 with the continued employment of plaintiff until that date at his regular compensation. On December 31, 1985 plaintiff would receive the lump sum of $38,350 "as settlement in lieu of litigation," which sum would "not constitute salary or wages for pension credit or for any other purpose" and would be paid to plaintiff "in return for his relinquishment of all tenure and seniority rights ... and [plaintiff's] right to litigate same." The agreement further provided for mutual releases.

Plaintiff was paid his salary through December 31, 1985, but was then tendered a check for $20,489.97, representing the agreed lump sum of $38,350 with deductions for federal and state income tax and social security. Plaintiff refused to accept the check and returned it. Defendant then tendered a second check for $34,836.87, representing the agreed-upon lump sum minus deductions for social security only. This check also was returned, plaintiff claiming that the social security deduction was also improper. Defendant unilaterally reported to the Internal Revenue Service that plaintiff had been paid the full sum of $38,350 and that this sum constituted wages for income tax purposes.

Plaintiff filed this action in the Chancery Division seeking an order to direct defendant to comply with the settlement agreement and pay the full amount of the lump sum without deductions. By way of answer, defendant claimed that federal law required the deductions and that the court lacked subject matter jurisdiction. Additionally, at oral argument in the Chancery Division defendant raised the further bar of 26 U.S.C.A. § 3403, claiming that it provided immunity from suit for employers who deduct and pay taxes. Judge Huot found for plaintiff, awarding him both the full amount of the agreed settlement plus interest from the date payment was to have been made.

Defendant raises five points on this appeal: first, defendant properly withheld the taxes; second, the trial court lacked jurisdiction to render a tax decision, and if it had jurisdiction, it abused its discretion in issuing the order; third, § 3403 of the Internal Revenue Code prohibits this suit; fourth, the court abused its discretion in directing the payment of interest; and fifth, summary judgment was inappropriate.

We determine that Judge Huot's substantive decision to require payment of the total settlement sum was correct. He further took the expedient step of conditioning payment upon plaintiff's agreement to indemnify defendant for any tax liability or penalties which might be imposed upon defendant by reason of this direct payment. From our reading of the federal tax law there was at least a bona fide question of whether there should have been a deduction for withholding tax and social security; but this question is not dispositive of the case. This is apparent when we focus upon the rights relinquished by plaintiff in consideration for the lump sum payment, namely both tenure rights and the tort claims noted earlier in the nature of defamation, discrimination and interference with economic advantage, but not a recapture of lost salary.

The initial loss was of the tenure rights, which is a right to continued employment. The payment was not in lieu of a fixed payment due from the Board to plaintiff for any particular period, and plaintiff had the opportunity as of January 1, 1986 to work elsewhere, duplicate the payments he would have received from defendant, and in fact, achieve new tenure rights somewhere else. The distinction between payment for an intangible right as opposed to severance pay in lieu of wages or other fixed monetary benefits has been the subject of various Revenue Rulings interpreting an employer's duty to withhold a portion of an employee's pay for income tax and social security. Although the payment in question here was reportable by plaintiff as gross income, the challenge before us is not one to the reportability of the settlement as gross income, 1 but rather defendant's duty to withhold income and social security taxes. A payment of gross income may nonetheless not be subject to withholding if it does not constitute "wages" under the pertinent sections of the Internal Revenue Code. Central Ill. Pub. Serv. Co. v. United States, 435 U.S. 21, 25, 98 S.Ct. 917, 919, 55 L.Ed.2d 82, 86-87 (1978). See also Rev.Rul. 58-301 and 58-76.

The income tax withholding obligations of an employer are governed by 26 U.S.C.A. §§ 3401 and 3402. Section 3401(a) defines "wages" as "all remuneration ... for services performed by an employee for his employer...." Among the specific examples of "wages" described by the interpretive regulation, 26 C.F.R. § 31.3401(a)-1(b)(4), is:

(4) Dismissal payments. Any payments made by an employer to an employee on account of dismissal, that is, involuntary separation from the service of the employer, constitute wages regardless of whether the employer is legally bound by contract, statute, or otherwise to make such payments.

The term "dismissal payments" has been interpreted by at least two courts to be the equivalent of severance pay. See Driscoll v. Exxon Corp., 366 F.Supp. 992, 993 (S.D.N.Y.1973); Cugini v. Com., Unemployment Compensation, 511 Pa. 264, 270, 512 A.2d 1169, 1172 (1986). This interpretation is confirmed in Rev.Rul. 58-301, Rev.Rul. 74-252 and Rev.Rul. 75-44. Revenue Ruling 58-301 held:

The lump-sum payment received by an employee as consideration for the cancellation of his employment contract constitutes gross income to the recipient in the taxable year of receipt. However, such amount does not constitute 'wages' for Federal employment and income tax withholding purposes.

As opposed to the payment for the cancellation of the intangible employment rights of a taxpayer in Rev.Rul. 58-301, the taxpayer in Rev.Rul. 74-252 was entitled to a specific six month payment at the termination of his contract. Rev.Rul. 74-252 determined that such six month salary payment was "in the nature of dismissal payments" and, therefore, wages for the purposes of F.I.C.A., FUTA and income tax withholding. The difference in the situations treated by the two rulings was that in the latter case the payments were made pursuant to the provisions of the contract rather than as consideration for the relinquishment of interest the employee had in his employment contract in the nature of property.

Defendant urges that a later ruling, Rev.Rul. 75-44, is to the contrary, and we do note a subtle change in emphasis that calls the payment here into question. In that case it was determined that a lump-sum payment for relinquishment of contractual seniority and longevity rights was income subject to withholding. The Ruling reiterates the continued viability of Rev.Rul. 58-301, but apparently limits it to a situation where a fixed term agreement is prematurely terminated as opposed to a similar termination of "an employment contract which contemplated a relation between the parties that was to continue indefinitely...." Of course, plaintiff's teaching contract was of the latter variety. The revenue rulings in question do not, however, treat the case of whether the termination of an open-ended tenure arrangement combined with the settlement of apparently viable tort claims would constitute wages subject to withholding.

Were it not for the parties' agreement, Rev.Rul. 75-44 and the ambiguous nature of the payment would have raised an issue of fact concerning the primary thrust of the settlement, thus necessitating an evidential hearing. But the parties' express characterization of the payment precludes the determination sought by defendant here....

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3 cases
  • Nelson v. Elizabeth Bd. of Educ.
    • United States
    • New Jersey Superior Court — Appellate Division
    • January 26, 2021
    ...the award." Bd. of Educ. v. Levitt, 197 N.J. Super. 239, 244, 484 A.2d 723 (App. Div. 1984) ; Emerick v. Teaneck Bd. of Ed., 221 N.J. Super. 456, 464, 534 A.2d 1044 (App. Div. 1987) (noting that the defendant had use of plaintiff's money in its decision to uphold an award of prejudgment int......
  • Gerardo v. New Jersey State Parole Bd.
    • United States
    • New Jersey Superior Court — Appellate Division
    • December 9, 1987
  • Hudson County Chamber of Commerce v. City of Jersey City
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    • April 22, 1997
    ...(suit for reimbursement of overpayments made to the Public Employees' Retirement System). See also Emerick v. Teaneck Bd. of Educ., 221 N.J.Super. 456, 464-65, 534 A.2d 1044 (App.Div.1987) (court declined to interfere with the trial judge's award of prejudgment interest against a public ent......

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