Klender v. U.S., 02-10082-BC.

• Decision Date: 02 August 2004
• Docket Number: No. 02-10082-BC.,02-10082-BC.
• Citation: 328 F.Supp.2d 754
• Parties: Phyllis F. KLENDER, William B. Rase, Roger J. Petri, and all similarly-situated individuals, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Michigan

328 F.Supp.2d 754

Phyllis F. KLENDER, William B. Rase, Roger J. Petri, and all similarly-situated individuals, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 02-10082-BC.

United States District Court, E.D. Michigan, Northern Division.

August 2, 2004.

James D. Ponscheck, Jeffrey L. Nyquist, Michigan Education Association, East Lansing, MI, Suzanne K. Clark, Amberg, Firestone, Southfield, MI, for Plaintiffs.

Thomas P. Cole, Department of Justice, Tax Division, Washington, DC, for Defendant.

OPINION AND ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND DENYING GOVERNMENT'S MOTION FOR SUMMARY JUDGMENT

LAWSON, District Judge.

This case presents the issue of whether installment payments toward a fixed sum made to school teachers by their school districts as an inducement to relinquish their tenure rights and retire early constitute "wages" from which deductions must be made under the Federal Insurance and Contribution Act (FICA), 26 U.S.C. § 3101, et seq. Although this issue has not yet been addressed by the Sixth Circuit, a similar case decided by the Eighth Circuit answered that question in the negative. See North Dakota State Univ. v. United States, 255 F.3d 599 (8th Cir.2001). The government urges this Court not to follow North Dakota because the early retirement program that benefited the tenured university professors in that case is materially different from those presented here, and because, in the government's view, North Dakota was wrongly decided. The Court believes, however, that a critical reading of the statutory language, as interpreted by Revenue Rulings issued by the Department of Treasury and guided by Supreme Court and Sixth Circuit precedent, leads ineluctably to the conclusion reached by the Eighth Circuit.

I.

The material facts of the case are not in dispute. The named plaintiffs are all public school teachers who had worked for several years in their respective school districts and achieved tenured status. It appears that long-term teachers command larger salaries then newer employees under the various districts' collective bargaining agreements as a result of longevity premiums. Consequently, over the last few years some school districts have offered severance plans designed to induce more senior teachers to separate from the district in exchange for a fixed sum payable in regular installments.

Participation in the programs was entirely voluntary. However, each of the severance plans, described in more detail below, required the teacher to relinquish his or her right to continued employment as a tenured teacher under Michigan's Teacher Tenure Act, Mich. Comp. Laws § 38.71, et seq., and some of the plans limited the rights of the teachers to seek re-employment with the district. All of the named plaintiffs availed themselves of the opportunity to participate, and after they severed their employment they began to receive their installment payments. The respective school districts withheld from each payment an amount for taxes under FICA. The teachers contended that the payments under the incentive programs did not constitute "wages" within the meaning of FICA, and they each sought a refund from the Internal Revenue Service (IRS). When the refunds were refused, this suit was commenced.

The plaintiffs moved to certify the action as a class action, and on June 18, 2003 the Court entered an order granting the plaintiffs' motion and certifying the class. Motions for reconsideration of the order then were filed by both parties. On November 4, 2003, this Court entered an order granting in part and denying in part the motions for reconsideration and amended the class certification order to define the following class:

all individuals a) formerly employed by public school districts, public colleges or universities or community colleges; b) residing in the Eastern District of Michigan; c) who received from the school district, public colleges or universities or community colleges, a payment in exchange for a property right or the right to continued employment absent just cause for termination, pursuant to an Early Retirement Incentive Plan; d) who applied to the Internal Revenue Service for a refund of the portion of said payment that was withheld as taxes and other payroll deductions as if from wages pursuant to the Federal Insurance Contribution Act within two years from the time the tax was paid; and e) whose refund was refused by the Internal Revenue Service on or after March 27, 2000, or who filed a claim for a refund before September 27, 2001 that was not acted upon before March 27, 2002.

Order, Nov. 4, 2004, at 8. Prior to entry of that order, the plaintiffs filed an amended complaint on August 1, 2003 in which they amended their prayer for relief to include a request for attorney fees.

Plaintiffs Phyllis Klender and Roger Petri both were employed by the Pinconning Area School District, although they did not retire early under the same plan. Plaintiff William Rase was employed by the West Branch-Rose City Area School District. Since the government has suggested that differences between the incentive plans in this case and the one discussed by the Eighth Circuit in North Dakota might be material, the Court will review the salient features of the plans in which the respective named plaintiffs participated.

A. Phyllis Klender

In 2000, the Pinconning Area Schools in Pinconning, Michigan created an "Employee Severance Plan" designed to induce long-term employees to leave their jobs. In the plan, the school district stated that it had "determined that a limited program of severance of employment among a specified group of employees would permit the District to control salary and operating costs and better fulfill its educational purposes." Pl.s' Mot. Summ J. Ex. C; Gov't Mot. Summ. J. Ex. 2. The plan was available to "teaching staff who have twenty (20) or more years of service with Pinconning Area Schools as of June 30, 2000." Ibid. The school district offered employees who chose to participate in the plan certain benefits that were categorized under two separate options. Under "Option 1," the employee had to separate from the school district on June 30, 2000 and would receive "$46,800 divided into 72 monthly payments (six (6) years)." Ibid. Under "Option 2," the employee had to separate from the district on June 30, 2001 and would receive "$43,200 divided into 72 monthly payments (six (6) years)." Ibid.

In exchange for the payments, the employees agreed to give up the following rights:

In consideration of benefits to be received under the Plan, the employee shall waive (effective on the date of his/her separation from district service) all future employment rights, all entitlements to future wages and benefits increases, all rights to participate in any district-sponsored benefit plans (other than the right to payments under this Plan and the right to purchase continuation of heath, dental and vision benefits under COBRA) and shall agree not to apply for reemployment (unless such application is consented to by the district).

An employee who elects to participate in the Plan shall be required to execute the following documents which are results of the negotiated agreement between the District and the Pinconning Education Association:

ExhibitB — "Indication of Interest — Notice of Election Form"

ExhibitC — "Employee Severance Plan"

ExhibitD — "Release and Waiver of Claims Agreement"

ExhibitE — "Notice of Enrollment"

ExhibitF — "Tabulation of Eligibility and Non-Eligibility"

Ibid. The indication of interest form is a document wherein the employee agreed to resign from the school district by a certain date. The employee severance plan form is the document in which the employee elected option one or two under the plan. The notice of enrollment and tabulation of eligibility forms are documents providing the applicant with general information about the plan. See e.g., Pl.s' Ex. C; Gov't Ex. 4-6.

The "Release and Waiver of Claims Agreement" form constituted a broad release of claims against the district. The form provides, in pertinent part, that

[t]he signature of the Employee herein constitutes the release and waiver of any and all claims against the District, District representatives and the Pinconning Education Association/MEA/NEA including, but not limited to, any rights to reappointment in any subsequent fiscal school year, and to any and all claims existing in equity or law under federal and state law or board policy pertaining to any right to reappointment or tenure rights by virtue of any expressed agreements or oral understandings. Further, the Employee hereby waives any and all claims, causes of actions, grievances, or complaints against the District and District representatives relating to resignation of employment, relinquishment of any and all tenure rights and rights to reappointment.

Pl.'s Ex. C; Gov't Ex. 6. The form also states that the employee waives, among other things, his or her rights to bring suit under "Title VII of the U.S. Civil Rights Act of 1964 or any other statute, constitutional provision or common law theory related to employment, employment discrimination or his/her separation from employment" and under the "Age Discrimination in Employment Act of 1967 and the Older Workers Protection Act of 1990." Ibid.

In the fall of 1999, the Pinconning Area Schools offered plaintiff Phyllis Klender the opportunity to participate in the plan and retire early from her employment. Klender qualified for the plan having worked as a librarian for the Pinconning Area Schools since January 1968. Klender obtained tenure from the school district in 1971 after successfully completing her probationary period and receiving positive evaluations. On December 14, 1999, Klender signed the indication of interest form, elected "Option 1" on the employee severance plan form, and thus she agreed to retire early on June 30, 2000 in exchange for the sum of...