Philadelphia Business Lawyers: How Should FMLA Settlement Amounts Be Reported to the IRS?

In Gunter v. Cambridge-Lee Industries, LLC, Vincent Gunter alleged that his rights under the FMLA were violated by his employer.  CV 14-2925, 2016 WL 3762992, at *1 (E.D. Pa. July 14, 2016). The two parties ultimately were able to reach a settlement. However, the parties were unable to agree on how the settlement proceeds should be reported to the Internal Revenue Service.

Gunter’s position was that the proceeds of the settlement were not wages and were not subject to withholding or reporting to the IRS on Form W-2 but instead should be reported to the IRS on Form 1099. The Defendant employer contended that the proceeds of the settlement did constitute wages that must be reported to the IRS on form W-2 subject to the withholding of taxes and other payroll charges. However, there was no binding Third Circuit precedent with regard to this particular issue.

In deciding this issue, the Court found two cases be persuasive. In Churchill v. Star Enters, the Court found that the relevant regulations and the FMLA statute specifically required the performance of services in order for the payment to constitute wages for withholding purposes. 3 F. Supp.2d 622 (E.D. Pa. 1998). As a result, the Court held that no withholding of the judgment was mandated under either federal or state law. In Carr v. Fresenius Med. Care, the Court found that recovery under the FMLA “does not constitute back pay but an amount of damages equal to the sum of various components, including, but not limited to, lost wages.”  2006 U.S. Dist LEXIS 29627, at *7-8, 2006 WL 1339970. Following this reasoning of these two cases, the Grunter Court held that an award, and in this case a settlement, does not constitute wages for Plaintiff that are subject to the withholding of taxes.