U.S. Supreme Court Deems FELA Payments as Taxable

Earlier this week, the United States Supreme Court issued an opinion in BNSF Railway Co. v. Loos, holding that a railroad’s payment to an injured worker for lost wages is taxable under the Railroad Retirement Tax Act (RRTA). In so ruling, the Court rejected the view previously expressed by the 8th Circuit Court of Appeals and several state Supreme Courts, that a payment for lost wages was not taxable under the RRTA because it did not represent compensation for services actually rendered by the employee. According to the Supreme Court, the railroad retirement system’s statutory framework is akin to the Social Security system. Just as the RRTA’s payroll tax—which applies to compensation paid to railroad workers—funds the railroad retirement system, so too the Federal Insurance Compensation Act’s (FICA) payroll tax—which applies to wages paid to workers—fund the Social Security system. Accordingly, the Supreme Court determined that taxation of payments made for lost compensation under the RRTA should be treated as taxable, just like payments for lost wages under the FICA.

“The Supreme Court’s decision ends a split between those jurisdictions that treated lost wage damages as taxable under the RRTA and those that did not, including, most significantly, the 8th Circuit,” says Matt Murphy, attorney at Minneapolis-based Nilan Johnson Lewis practicing in the area. Going forward, railroads are entitled to an offset against payments made to injured workers for lost wages equal to the amount of their withholding obligations under the RRTA, regardless of forum. “This decision will also change the nature of settlement negotiations in jurisdictions where, prior to Loos, payment for lost wages was not treated as taxable under the RRTA,” concludes Amanda Cialkowski, attorney at Nilan Johnson Lewis who also represents railroads in FELA litigation in state and federal courts throughout the Upper Midwest. In those jurisdictions, the parties will now have to address the fact that RRTA taxes must be paid on any portion of the settlement proceeds that are attributable to lost wages.

If you would like to speak with Matt Murphy or Amanda Cialkowski about the impact of this decision, contact Matt at mmurphy@nilanjohnson.com or 612.305.7701 and Amanda at acialkowski@nilanjohnson.com or 612.305.7538.

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