Cifuentes v. Costco: Former Employer Properly Withheld Payroll Taxes When Paying Judgment for Lost Wages

In Cifuentes v. Costco Wholesale Corporation (6/26/15) --- Cal.App.4th ---, the plaintiff sued his former employer, Costco, for breach of contract and received a judgment for more than $300,000 in back pay and front pay. Costco paid the judgment, withholding payroll taxes from the portion of the judgment attributed to lost wages. The trial court denied Costco's motion for an acknowledgement of satisfaction of judgment, and Costco appealed. The Court of Appeal reversed, holding that Costco properly withheld employment taxes from the portion of the judgment representing lost earnings:

Under prevailing federal decisional law, an award of back or front pay arises from the employer-employee relationship, and therefore qualifies as wages, even though the plaintiff is no longer employed and the award is not for actual services performed.

Addressing the effect of the plaintiff's obligation to pay his attorneys from his recovery, the Court stated:

Additionally, we reject Cifuentes' assertion the withholding was improper because it did not take into account his obligation to pay his attorney a contingency-based fee. As Costco points out, the entire award of lost wages was taxable as income regardless of whether a portion was used to pay contingent attorney fees. (C.I.R. v. Banks (2005) 543 U.S. 426, 430 ["[T]he litigant's income includes the portion of the recovery paid to the attorney as a contingent fee"].) Nor are we convinced by Cifuentes' reference to the section of the American Jobs Creation Act of 2004 authorizing an "above-the-line" deduction of attorney fees and costs incurred in connection with a claim of discrimination or retaliation. (26 U.S.C. § 62(a)(20), (21).) The award in this case was for breach of contract, not unlawful discrimination or retaliation. (See Banks, at p. 439.) 

The opinion is available here.