Opinion
F076934
06-12-2020
ESTHER CONTRERAS, Plaintiff and Respondent, v. ASHRIA, LLC, Defendant and Appellant.
Braun & Melucci and Kerri M. Melucci for Defendant and Appellant. Whelan Law Group, Walter W. Whelan and Lucas C. Whelan for Plaintiff and Respondent.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 15CECG03848)
OPINION
APPEAL from a judgment of the Superior Court of Fresno County. Jeffrey Y. Hamilton, Jr., Judge. Braun & Melucci and Kerri M. Melucci for Defendant and Appellant. Whelan Law Group, Walter W. Whelan and Lucas C. Whelan for Plaintiff and Respondent.
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Esther Contreras (Contreras) brought a wrongful termination lawsuit against her former employer, Ashria, LLC (Ashria), in which she sought to recover damages for lost wages and emotional distress. On the eve of trial, the parties entered into a settlement agreement orally before the trial court, which subsequently was memorialized in writing. The settlement agreement required Ashria to pay Contreras a "gross settlement" of $100,000. A dispute subsequently arose about whether Ashria was to pay the settlement funds without deduction for payroll taxes, which would require Ashria to issue Contreras a 1099-MISC form, or by deducting payroll taxes and issuing Contreras a W-2 form. Ultimately, Ashria deducted payroll taxes from the settlement amount and issued Contreras a check for the net amount.
Contreras filed a motion for judgment to enforce the settlement agreement, asking the trial court to enter a judgment that would designate $7,000 of the settlement amount as payment for lost wages, on which payroll taxes would be withheld and a W-2 form issued, and the remainder designated as emotional distress damages, which would be paid to her in full and a 1099-MISC form issued. The trial court granted the motion and issued the requested judgment.
On appeal, Ashria contends the trial court acted in excess of its jurisdiction when it interpreted the settlement agreement as containing terms not found within it. Ashria asserts the added terms were contrary to its understanding and intent, and resulted in a material alteration of its duties and obligations under the settlement agreement. Finding no merit to Ashria's contentions, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In December 2015, Contreras filed a complaint against Ashria alleging causes of action for wrongful termination in violation of public policy, retaliation in violation of Labor Code section 1102.5, and intentional infliction of emotional distress. Contreras alleged she began working as an assistant manager in Ashria's Popeyes Louisiana Kitchen restaurant in January 2014, and her employment was wrongfully terminated on October 2, 2015. In the complaint, Contreras sought to recover: (1) compensatory damages, including "past and future lost wages and employee benefits (with interest on said amounts), diminished employability, other economic injury, and emotional distress damages, all in an amount according to proof"; (2) punitive damages; (3) prejudgment interest; (4) attorney fees; and (5) costs of suit.
On August 11, 2017, after a trial readiness hearing, the parties participated in a judicial settlement conference before the Honorable Jeffrey Y. Hamilton, Jr., and reached a settlement, which was entered into in open court, but not reported. Later that day, Contreras's attorney prepared a draft, written version of the settlement agreement. On August 14, 2017, Ashria's attorney proposed some revisions to the agreement, which were acceptable to Contreras's attorney, and the parties signed the agreement.
The settlement agreement (agreement) provided in the first paragraph that "[f]or the sole consideration of the payment by Defendant ASHRIA, LLC ... of the gross settlement of One Hundred Thousand Dollars ($100,000.00) exactly made payable jointly" to Contreras and her attorney, Contreras would release all her claims against Ashria.
The second paragraph, labeled "Consideration," stated: (1) Ashria "shall pay Plaintiff One Hundred Thousand Dollars ($100,000.00) exactly ('Settlement Amount')"; (2) Ashria "shall deliver the Settlement Amount" to Contreras's attorney within 15 days of the execution of the agreement; and (3) Contreras agreed "payment of the Settlement Amount in the manner set forth in this Agreement is fully acceptable," which she acknowledged "constitutes an accord and satisfaction and a full and complete settlement of her claims and the pending lawsuit," and "the entire amount of monetary consideration to be provided to" Contreras under the agreement. The agreement required Contreras to dismiss the complaint with prejudice within 15 days of receipt of the settlement amount.
The agreement contained an integration clause that provided the agreement "contains the entire agreement of the parties hereto with respect to the subject matter herein contained," and "[t]here are no restrictions, promises, warranties, covenants, undertakings, or representations other than those expressly set forth herein." The parties acknowledged they had not relied on any representations by the other party that were not expressly set forth in the agreement, which could be amended "only by written instrument executed by both parties." The agreement stated it "shall be governed by the law of the State of California applicable to contracts executed and wholly performed therein."
A dispute immediately arose over whether Ashria should withhold payroll taxes from the settlement amount. When one of Contreras's attorneys sent Ashria's attorney, William Braun, the agreement adopting Braun's changes on August 14, 2017, the attorney stated he would forward the agreement with Contreras's signature as soon as she signed it, with the understanding she would "receive a check in the amount of $100,000, without any deductions," within 15 days from Ashria's execution of the agreement. Braun responded they would "deliver a settlement check in accordance with the Settlement Agreement" within 15 days of a receiving a fully executed agreement. Another of Contreras's attorneys, Walter Whelan, asked Braun whether that meant the check would be for the full amount or Ashria would make payroll deductions.
According to Braun, the attorney sent him a copy of the agreement signed by Contreras's attorney, but not Contreras, and the next day, Braun forwarded a copy of the same agreement signed by Ashria and its counsel. At that time, Contreras was the only party who had not signed.
On August 17, 2017, Whelan emailed Braun they were going to strike the word "gross" that was inadvertently included on the first page of the agreement and forward it to him. The next day, Braun forwarded the agreement, signed by himself, Ashria, and one of Contreras's attorneys, to Whelan, noting the agreement Contreras signed was modified after Ashria signed the agreement and it did not agree to the modification. Braun stated they were analyzing what the modifications meant and what Ashria's position would be.
According to Contreras's attorneys, Contreras signed the settlement agreement on August 14, 2017, without striking out the word "gross." It was only after Braun stated he would deliver the settlement check in accordance with the agreement that Contreras's attorneys attempted "to revise and clarify the agreement" she already signed by striking out the word "gross," which Ashria's attorneys rejected.
Whelan emailed Braun on August 24, 2017, explaining that while they initially believed there should not be any withholding from the settlement amount based on Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500 (Lisec), which held it was inappropriate to withhold any portion of a settlement in a wrongful termination case, that case had been "overruled" by Cifuentes v. Costco Wholesale Corp. (2015) 238 Cal.App.4th 65 (Cifuentes). Whelan proposed Ashria withhold the wage loss portion of the settlement which, according to Contreras's deposition testimony, was about $7,000, and the clarification could be included in a revised settlement agreement. If Braun disagreed with that approach, however, they would set up a court hearing to resolve the issue.
Braun responded on August 28, 2017, that he was waiting to discuss the matter with Ashria, but he believed Cifuentes said the entire settlement amount was wages and asked to extend the payment deadline to further discuss the issue. Whelan responded that he did not think an extension was needed to resolve a very narrow issue, as neither Lisec nor Cifuentes stood for the proposition that withholding is required for something other than wages and the only part of the settlement amount that arguably was wages was the gap in wages Contreras suffered between the time she was terminated and when she regained the same income at a new job. Braun responded that since Whelan was unwilling to agree to extend the payment deadline, Ashria would issue the check it thought appropriate on September 1, 2017.
On August 31, 2017, Ashria issued a check payable to Contreras and her attorneys in the amount of $40,186.31. Ashria retained federal income tax of $37,680.64, Medicare tax of $1,450, Social Security tax of $6,200, California state income tax of $13,583.05, and California disability tax of $900.
In a letter accompanying the check, Braun explained the entire settlement amount constituted taxable income because the damages Contreras alleged were taxable as wages under state and federal law. Ashria therefore withheld the required federal and state taxes on the settlement amount, which Ashria's payroll service calculated. Braun stated the proposal to withhold tax only for past lost wages of $7,400, with Contreras indemnifying Ashria as to any tax liability, was unacceptable, as Contreras did not have any significant assets to fulfill the obligation and it is a crime for an employer not to withhold taxes from an employees' income. Braun stated Contreras's recourse was to seek a refund from the taxing authorities for amounts withheld in excess of her claimed tax obligation.
Contreras filed a motion for judgment to enforce the settlement agreement pursuant to Code of Civil Procedure section 664.6, to be heard by Judge Hamilton. Contreras sought to enforce the settlement entered into in open court on August 11, 2017, and the "subsequent written affirmation of that binding settlement agreement which was executed by the parties." The motion was made on the grounds that the parties entered into a binding settlement agreement requiring Ashria to pay a certain settlement amount, which it failed and refused to do by the deadline established under the agreement. Contreras sought entry of judgment consistent with the parties' agreement.
Further undesignated statutory references are to the Code of Civil Procedure.
Contreras summarized the essential elements of the agreement as follows: (1) Ashria must pay Contreras $100,000 within 15 days of execution of the written agreement; (2) Contreras would dismiss her claims against Ashria with prejudice 15 days thereafter; (3) the agreement was confidential; and (4) the agreement contained a liquidated damages provision. Contreras further asserted Judge Hamilton confirmed the agreement's essential terms with the parties, who orally expressed their consent to the agreement in open court, and the written agreement contained all of the orally articulated terms.
Contreras argued Ashria improperly treated the entire $100,000 as wages subject to payroll tax withholding, as it was well aware Contreras did not claim that much in lost wages. Contreras pointed to her April 1, 2016 verified response to a form interrogatory in which she stated her total income loss to date was $5,060.51, as well as her July 5, 2017 deposition testimony that her wage loss was about $7,000. Contreras explained in her declaration submitted with the motion that after her employment with Ashria was terminated on October 2, 2015, she was unable to find employment until she started working as a hostess at a restaurant on December 17, 2015. In April 2016, she was elevated to a server position and started making more money than she made at Ashria. Contreras declared her wage loss between October 2, 2015, and the end of April 2016 was approximately $7,000.
Whelan stated in his declaration in support of the motion that at the close of Contreras's testimony, Braun commented that he intended to bring an in limine motion at trial to preclude Contreras from presenting any evidence of economic loss because there were "no lost wages."
Contreras argued that because she had at most $7,000 in lost wages, it was improper to treat the entire settlement amount as payment for lost wages. Contreras claimed nothing in Cifuentes required an employer to withhold taxes for emotional distress or punitive damages, and the employer's withholding obligation extended only to payments for wages. Contreras asserted the remaining $93,000 in emotional distress and punitive damages should be reported as other income on a 1099 form, which is not subject to the payroll tax withholding requirement, and Ashria should be required to immediately pay Contreras the amounts wrongfully withheld. Contreras also argued she was entitled to liquidated damages and attorney fees pursuant to a liquidated damage clause and an attorney fee provision in the agreement.
Ashria opposed the motion, arguing it must be denied because Ashria did not consent to making a $100,000 payment to Contreras for non-wage claims and the written terms of the agreement did not require it to pay Contreras by a Form 1099 without deduction. Ashria argued that because Contreras was seeking over $100,000 in past and future wage losses, it was required by law to withhold taxes from the settlement payment and if it failed to do so, it could be subject to financial and criminal penalties. In addition, it could be exposed to liability for any taxes Contreras failed to pay should the Internal Revenue Service (IRS) and California authorities determine the entire settlement amount was compensation for wages. Ashria asserted Cifuentes held it did not have to bear this risk. Ashria claimed the court would be acting outside its jurisdiction if it entered judgment against Ashria on terms not found in the agreement and that would cause Ashria to violate state and federal law.
Ashria stated Contreras was misleading the court when she argued Ashria was aware she was not claiming anywhere near $100,000 in lost wages, as Contreras's attorney had consistently claimed $100,000 in future lost wages, plus a modest amount in past lost wages. Ashria asserted Contreras's discovery and pretrial filings showed she was seeking to recover damages for past and future lost wages. While Contreras stated in her response to the form interrogatory that her lost income to date was $5,060.51, she also responded that she would lose income in the future, as her hourly wage was lower at her current employment than what it was while working for Ashria, and based on the difference in her wages, the approximate lost amount was "$15/day, going forward." Ashria also pointed out that Contreras submitted a proposed jury instruction on past and future lost wages.
This assertion was based on Braun's statement in his declaration that in an August 3, 2017 settlement conference, Contreras took the position she was entitled to recover $7,414 in past lost wages, $100,000 for future lost wages, and an unspecified amount for emotional distress.
Ashria confirmed the parties agreed to settle Contreras's claims at the August 11, 2017 settlement conference before Judge Hamilton for a payment of $100,000. Ashria claimed Contreras's attorney never raised the issue of allocation of the settlement proceeds to non-wage claims and never requested payment via a 1099 form during settlement discussions. There was no meeting of the minds that the payment was for damage categories other than wage claims. Moreover, when Contreras's attorney drafted the settlement agreement, he did not draft any provision allocating payment for emotional distress or punitive damages, or indicate allocation was a material term of the settlement. Instead, the agreement was silent as to damage allocation and form of payment.
Accordingly, Ashria argued, to interpret the agreement as compensating her for $7,000 in wages and $93,000 in non-wage income was contrary to the agreement's stated terms. In addition, the agreement expressly provided that it "shall be governed by the law of the State of California applicable to contracts," which requires employers to withhold taxes from wages paid to employees.
Ashria also argued the court could not modify the agreement to require Ashria to pay Contreras with a 1099 form without withholdings, as it never agreed the $100,000 was compensation for non-wage income nor consented to assume the risk should Contreras fail to pay her tax liability. Ashria asserted the court did not have the authority, when considering approval of a settlement under Code of Civil Procedure section 664.6, to add or modify an express term of the settlement, and any resulting judgment would be an act in excess of the court's jurisdiction.
In reply, Contreras asserted she was merely seeking to enforce the written agreement Ashria and its attorney signed on August 14, 2017, which required Ashria to pay her $100,000. Contreras confirmed there was no discussion about allocating any percentage of the settlement payment to wages versus non-wage recovery. Contreras argued there was no evidence to substantiate future lost wages, given Contreras's actual wage history, or that she suffered wage loss beyond $7,000, and until the settlement conference, Ashria and its counsel were adamant Contreras could not recover any future lost wages. Contreras claimed the settlement agreement was enforceable, even though it did not allocate payment between wage and non-wage damages, as it was implied the parties would comply with the law governing when taxes should be withheld.
The trial court issued a tentative ruling to grant the motion, ordering Ashria to treat no more than $7,000 of the settlement as wages for income tax withholding purposes, and awarding Contreras her attorney fees. The trial court found the parties orally reached a settlement at the August 11, 2107 pretrial settlement conference, that was reduced to writing and executed on August 14, 2017, which required Ashria to pay Contreras $100,000 within 15 days after execution. The trial court further found the payment was made one business day late and Ashria withheld $59,813.69, treating the entire $100,000 settlement as wages.
The trial court agreed with Contreras that Ashria was not justified in treating the entire settlement as wages. The trial court explained that based on Cifuentes, wages are subject to withholding, but according to IRS publications, sums that are not wages, such as punitive damages and damages for nonphysical injuries or sickness, should be reported on a 1099 form, and amounts that have been over-withheld should be returned to the employee.
The trial court noted the opposition was based primarily on the contention Contreras "sought $7,414 in past lost wages and $100,000 in future lost wages," but the $100,000 figure came from a statement Contreras's attorney made during a settlement conference, which was inadmissible under Evidence Code section 1119. The trial court found that while Contreras sought future lost wages in her complaint, she could not have known the extent of those damages at the time; when she filed her interrogatory responses, there was still a gap in income between her replacement job and her position with Ashria; and it was undisputed Contreras stopped accumulating lost wages toward the end of April 2016, when Contreras fully mitigated her damages by obtaining a position that paid more than she made with Ashria. The trial court did not find Contreras's request for a jury instruction on past and future lost wages was evidence Contreras actually sought future wages, as the instruction was one of many on a list of proposed instructions and the filing did not specifically mention future lost earnings. Thus, in light of the undisputed and unequivocal evidence that Contreras had no future lost wages and her past lost wages totaled around $7,000, Ashria could not justify treating the entire $100,000 settlement as past and future lost wages.
As for Ashria's contention Contreras was asking the court to interpret the settlement agreement contrary to its stated terms, the trial court found requiring Ashria to withhold taxes consistent with the law would not constitute a modification of the agreement. The trial court explained that since the agreement expressly provided its terms were governed by California law, which requires employers to withhold taxes from wages paid to employees, and only $7,000 of the settlement amount could conceivably be construed as wages, it was simply ordering Ashria to comply with the law. The trial court stated it would reject Contreras's claim for liquidated damages, but award Contreras reasonable attorney fees.
After oral argument by counsel, the trial court took the matter under submission. It subsequently issued an order granting the motion. The court ordered Ashria to treat no more than $7,000 of the settlement as wages for income tax withholding purposes and awarded Contreras $9,702.50 in attorney fees. The trial court entered judgment against Ashria in the amount of $109,702.50. The judgment stated Ashria was "permitted to withhold payroll taxes, as permitted by law, corresponding to wages in the amount of $7,000 only," for which Ashria would supply a W-2 form, and as to the balance of the judgment of $93,000 (not including attorney fees), Ashria would supply a 1099 form. The judgment was entered nunc pro tunc as of the date of the open court settlement on August 11, 2017. This appeal followed.
DISCUSSION
Ashria contends we must reverse the judgment because the trial court impermissibly added terms to the agreement that were contrary to its intent and the agreement's plain meaning. We disagree.
I. Basic Legal Principles and Standard of Review
Section 664.6 states in part: "If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court or orally before the court, for settlement of the case, ... the court, upon motion, may enter judgment pursuant to the terms of the settlement." (§ 664.6.) The statute provides a summary procedure in this way to enforce the parties' settlement agreement. (Leeman v. Adams Extract & Spice, LLC (2015) 236 Cal.App.4th 1367, 1373-1374; Hines v. Lukes (2008) 167 Cal.App.4th 1174, 1182.) The statute permits the court to retain jurisdiction over the parties for this purpose until they have fully performed the settlement terms. (§ 664.6.) This reservation of jurisdiction "simply grants the parties a streamlined procedure to enforce an agreement they made between themselves." (Hernandez v. Board of Education (2004) 126 Cal.App.4th 1161, 1175.)
The power of the trial court under section 664.6 "is extremely limited." (Hernandez v. Board of Education, supra, 126 Cal.App.4th at p. 1176.) " 'Although a judge hearing a section 664.6 motion may receive evidence, determine disputed facts, and enter the terms of a settlement agreement as a judgment [citations], nothing in section 664.6 authorizes a judge to create the material terms of a settlement, as opposed to deciding what terms the parties themselves have previously agreed upon.' " (Ibid.) Because a settlement agreement is simply a contract, "[t]he court is powerless to impose on the parties more restrictive or less restrictive or different terms than those contained in their settlement agreement." (Ibid.) "Neither this court nor the superior court can rewrite the oral settlement agreement or add what was omitted." (Canaan Taiwanese Christian Church v. All World Mission Ministries (2012) 211 Cal.App.4th 1115, 1126.)
Where, as here, the interpretation of a contract is at issue, a two-step process is involved: " 'First, the court provisionally receives (without actually admitting) all credible evidence concerning the parties' intentions to determine "ambiguity," i.e., whether the language is "reasonably susceptible" to the interpretation urged by a party. If in light of the extrinsic evidence the court decides the language is "reasonably susceptible" to the interpretation urged, the extrinsic evidence is then admitted to aid in the second step—interpreting the contract.' " (WYDA Associates v. Merner (1996) 42 Cal.App.4th 1702, 1710.)
"[T]he interpretation of a settlement agreement is governed by the same principles applicable to any other contractual agreement ...." (Winet v. Price (1992) 4 Cal.App.4th 1159, 1165.) "The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties [as it existed at the time of contracting]. (Civ. Code, § 636.) If contractual language is clear and explicit, it governs. (Civ. Code, § 1638.)" (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264; accord, Horath v. Hess (2014) 225 Cal.App.4th 456, 463-464.) " 'The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.' [Citation.] 'When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible ....' " (WYDA Associates v. Merner, supra, 42 Cal.App.4th at p. 1709; see Horath v. Hess, at p. 463.)
" 'California recognizes the objective theory of contracts [citation], under which "[i]t is the objective intent, as evidenced by the words of the contract, rather than the subjective intent of one of the parties, that controls interpretation." ' " (Iqbal v. Ziadeh (2017) 10 Cal.App.5th 1, 8.) "[E]vidence of the undisclosed subjective intent of the parties is irrelevant to determining the meaning of contractual language." (Winet v. Price, supra, 4 Cal.App.4th at p. 1166, fn. 3.) "It is the outward expression of the agreement, rather than a party's unexpressed intention, which the court will enforce." (Id. at p. 1166; see Salehi v. Surfside III Condominium Owners Assn. (2011) 200 Cal.App.4th 1146, 1159.)
II. Analysis
The parties concurred in the trial court that the agreement required Ashria to pay Contreras $100,000, but was silent as to whether that payment would be allocated between Ashria's various damage claims or the form of payment, i.e., whether by W-2 form or 1099-MISC form. Based on this concurrence, the trial court found the agreement called for the payment of $100,000, but did not specify whether it should be paid with or without payroll deductions. To resolve that issue, the trial court reviewed the evidence submitted, not to interpret the agreement, but rather to determine the amount of lost wages Contreras incurred, which would be subject to payroll tax withholding under Cifuentes. After finding Contreras's lost wages totaled around $7,000, the trial court concluded Ashria could not justify treating the entire settlement amount as past and future lost wages, and requiring Ashria to withhold taxes only on that portion of the settlement, consistent with the law, was not a modification of the agreement.
Ashria now contends the agreement required it to withhold payroll taxes on the entire $100,000 because the "express terms of the settlement agreement defines the entire $100,000 as subject to deductions." Ashria reasons that because the term "payment ... of gross settlement of One Hundred Thousand Dollars ($100,000) exactly" used the word "gross," which is defined as "consisting of an overall total exclusive of deductions," it was required to withhold payroll taxes from the $100,000 settlement amount and pay Contreras the "net" amount, which is an amount "free from all charges or deductions: such as" an amount "remaining after the deduction of all charges, outlay, or loss."
Throughout its opening brief, Ashria asserts this term stated it would pay "the gross amount" of $100,000 (emphasis added).
Merriam-Webster, Merriam-Webster.com Dictionary, adjective 3(b), https://www.merriam-webster.com/dictionary/gross (last visited June 11, 2020).
Merriam-Webster, Merriam-Webster.com Dictionary, adjective 1(a), https://www.merriam-webster.com/dictionary/net (last visited June 11, 2020).
Ashria did not make this argument below. Instead, it asserted the agreement "was silent as to damage allocation and form of payment." Generally, a litigant cannot change his or her position on appeal and assert a new theory, as it would be unfair to the trial court and opposing party. (Brown v. Boren (1999) 74 Cal.App.4th 1303, 1316.) Although Ashria's position on appeal arguably contradicts one it took below, we exercise our discretion to consider Ashria's argument because it presents a pure question of law related to the interpretation of the agreement. (Folden v. Lobrovich (1959) 171 Cal.App.2d 627, 630.)
We do not find the agreement reasonably susceptible to Ashria's interpretation. Merely because the agreement used the word "gross" does not mean, as Ashria asserts, it agreed to pay "$100,000 for gross wages, subject to payroll tax deductions." Instead, we read "gross settlement" of $100,000 to mean a payment of $100,000 without deduction. While we agree with Ashria that the term "gross" applies to the entire $100,000, this does not mean the $100,000 is to be treated as gross wages absent express language that the "gross settlement" was subject to payroll tax withholding. Our interpretation is consistent with the consideration paragraph of the agreement, which requires Ashria to pay Contreras $100,000 "exactly." (Civ. Code, § 1641 ["The whole of a contract is to be taken together, so as to give effect to every part, ... each clause helping to interpret the other."].)
Since Contreras sought lost wages as a portion of her damages, however, paying the settlement amount without any payroll tax withholding whatsoever would expose Ashria to potential liability for the portion of the settlement that constituted lost wages. (Cifuentes, supra, 238 Cal.App.4th at p. 71 ["an employer who fails to withhold payroll taxes from an award of back or front pay to a former employer exposes itself to penalties and personal liability for those taxes"].) Ashria contends the trial court erred when it failed to interpret the agreement in accordance with Cifuentes, arguing it was justified in relying on Cifuentes when it withheld taxes on the entire $100,000 because failure to do so could expose it to a very real risk that Contreras might not pay her tax liability when she filed her tax returns.
This requires a review of Cifuentes. There, a jury awarded the plaintiff, a former Costco employee, damages for past and future lost wages in his wrongful termination action. (Cifuentes, supra, 238 Cal.App.4th at p. 69.) When Costco paid the resulting judgment to the employee, it withheld payroll taxes. (Ibid.) The issue before the appellate court was whether an employer is required to withhold payroll taxes when paying a judgment to a former employee for past and future lost wages (back pay and front pay). (Id. at p. 70.)
Costco argued the award of back pay and front pay was subject to mandatory withholding because it constituted wages under applicable federal and state tax laws, while the employee argued the judgment must be satisfied in the amount written, as withholding was unlawful because the award was not remuneration for services performed by him on Costco's behalf. (Cifuentes, supra, 238 Cal.App.4th at pp. 70-71.) The employee relied on Lisec, a 1992 appellate court decision where the court held that because an award paid to a former employee was not made within the context of an ongoing employment relationship—i.e., an award of back pay covering a period of time when the employee did not actually perform any work for the employer—the award could not be considered wages and thus could not be subject to employment taxes. (Lisec, supra, 10 Cal.App.4th at p. 1507.)
The appellate court in Cifuentes first noted that both the Internal Revenue Code and California law require employers to collect income and other taxes by withholding them from wages paid to employees. (Cifuentes, supra, 238 Cal.App.4th at p. 71.) An employer who fails to withhold such taxes may be held liable for them, along with penalties and interest, and may be subject to criminal penalties. (Ibid.) Even if the tax is paid later, the employer is subject to liability for penalties and other statutory additions. (Id. at pp. 71-72.)
The appellate court explained that when Lisec was decided in 1992, there was little decisional guidance on the scope of wages as defined in the tax statutes. (Cifuentes, supra, 238 Cal.App.4th at p. 73.) In the years since Lisec, however, numerous federal courts had considered whether an award of back pay or front pay to a non-reinstated employee was subject to payroll tax withholding. With the exception of the Fifth Circuit Court of Appeals, federal appellate courts had adopted a broad interpretation of wages for taxation and withholding purposes, which included compensation in the employer- employee relationship for which no actual services were performed. (Cifuentes, at p. 74.) Persuaded by these authorities, the Cifuentes court adopted the prevailing federal view requiring an employer to withhold payroll taxes for all wages arising from the employer-employee relationship, even after that relationship has terminated, and concluded Costco properly withheld the payroll taxes. (Id. at p. 68.)
The Cifuentes court noted that when Costco paid the judgment, it had two alternatives: (1) it could follow Lisec and risk liability to the IRS and other taxing authorities for the amount of tax it failed to withhold plus penalties; or (2) it could follow the prevailing federal view and risk a judicial declaration the judgment was not satisfied. (Cifuentes, supra, 238 Cal.App.4th at p. 77.) The court concluded Costco chose correctly, as its potential exposure for failing to withhold the payroll taxes outweighed the inconvenience to the employee of seeking a refund for the excess withholding. (Ibid.)
Thus, Cifuentes holds that damages in the form of back pay and front pay constitute wages that are subject to payroll tax withholding, and an employer is justified in withholding payroll taxes from payments for these forms of damages. Cifuentes, however, does not answer the question presented here, namely, the extent of required withholding when a settlement amount is for both lost wages and emotional distress damages, but the settlement agreement does not allocate the payment between those categories. This is significant because, while emotional distress and punitive damages are taxable income to Contreras, they are not wages subject to payroll tax withholding; instead, such damages are subject to reporting on a 1099-MISC form. (Rosen et. al., Federal Employment Litigation (The Rutter Group 2020) ¶ 11:906, citing IRS Office of Chief Counsel Memorandum (Oct. 22, 2008), designated as Program Manager's Technical Advice 2009-035 (PMTA 2009-035).)
According to PMTA 2009-035, "[a] judgment or settlement payment may comprise multiple elements, each of which may or may not be wages. A court award may break down the amount of the award into its elements such as back pay, emotional distress damages, and interest, making it much easier to determine which portion(s) constitutes wages. However, in the case of a settlement payment, the parties must determine the elements of the settlement amount. This determination is made by considering all the facts and circumstances, including the remedies available for the particular claim. For example, a settlement payment may have to be allocated between back pay and other compensatory damages (e.g., emotional distress). As discussed, back pay is wages subject to employment taxes, but emotional distress damages are not. Proper allocation is also necessary to ensure proper reporting of the payment (Form W-2 or Form 1099)." (PMTA 2009-035 (Oct. 22, 2008), p. 10.)
We note that while PMTA 2009-035 does not constitute formal guidance taxpayers may rely on, it does indicate IRS's thinking on the subject matter. (Rosen et. al, Federal Employment Litigation, supra, ¶ 11:850.)
It is undisputed that Contreras's complaint alleged damages for lost wages and emotional distress, as well as punitive damages. The trial court found, based on the evidence presented, Contreras's lost wages comprised only $7,000, a finding Ashria does not challenge on appeal. In allocating the settlement amount between lost wages of $7,000 and the remaining $93,000 as non-wage income, the trial court merely was ensuring the payment complied with the law. As the trial court found, the agreement expressly provides it "shall be governed by the law of the State of California applicable to contracts," and California law requires employers to withhold taxes from wages paid to employees. (Cifuentes, supra, 238 Cal.App.4th at p. 71.) In allocating between wage and non-wage damages, the trial court was not modifying the agreement or interpreting it, as Ashria contends, but rather was ensuring the terms specified by the parties, namely, to pay $100,000 exactly, complied with the law. Accordingly, it was within the trial court's power to make this allocation and require Ashria to issue a W-2 form on the $7,000 of lost wages and a 1099-MISC form on the $93,000 of non-wage income.
Ashria does contend the trial court should not have admitted the evidence to interpret the agreement because the agreement is unambiguous. As we have explained, the trial court did not admit the evidence to interpret the agreement, but rather to determine the amount of Contreras's lost wages.
We note that generally a wrongful termination complaint alleges many types of damages, which require different tax treatment depending on whether they are wages, such as back pay or front pay, or non-wages, such as emotional distress or punitive damages. When reaching a settlement, the parties should allocate the settlement payment between these items of damages so the employer may withhold taxes in compliance with the law. While each party here faults the other for failing to include such an allocation in the agreement, both sides had input into the drafting of the agreement, yet they failed to characterize the nature of the settlement amount or allocate that amount between Contreras's lost wages and emotional distress damages. Although the parties should have included this in the agreement, since the parties agreed to a payment without any withholding, the trial court's allocation ensured that payment complied with the law and was not an improper modification of the parties' agreement.
DISPOSITION
The judgment is affirmed. Costs on appeal are awarded to Contreras.
DE SANTOS, J. WE CONCUR: POOCHIGIAN, Acting P.J. PEÑA, J.