Supreme Court Rules Railroad’s Payments to Injured Workers for Lost Wages Are Taxable

By | March 4, 2019

The Supreme Court has ruled that payments to injured employees for lost wages by a railway company are taxable under the Railroad Retirement Tax Act (RRTA).

The opinion in BNSF Railway Co. vs. Loos by Justice Ruth Bader Ginsburg, in which six other justices joined, likens the payments to wages under the Social Security system.

Michael Loos sued BNSF Railway Co. under the Federal Employers’ Liability Act (FELA) for injuries he received while working at BNSF’s railyard. A jury awarded him $126,212.78, with $30,000 of that amount ascribed to wages lost during the time Loos was unable to work.

BNSF claimed that the lost wages constituted “compensation” that is taxable under the Railroad Retirement Tax Act (RRTA) and asked to withhold $3,765 of the $30,000 to cover Loos’s share of the RRTA taxes.

The District Court and the Eighth Circuit rejected BNSF’s requested offset, holding that an award of damages compensating an injured railroad worker for lost wages is not taxable under the RRTA.

But the high court has now overturned those lower courts with this ruling that a railroad’s payment to an employee for working time lost due to an on-the-job injury is taxable “compensation” under the RRTA.

The RRTA is a self-sustaining retirement benefits system for railroad workers that is funded by a payroll tax on both railroads and their employees, referring to the railroad’s contribution as an “excise” tax and the employee’s share as an “income” tax. The Railroad Retirement Act (RRA) entitles railroad workers to various benefits. Taxes under the RRTA and benefits under the RRA are measured by the employee’s “compensation,” which both statutes define as “any form of money remuneration paid to an individual for services rendered as an employee.”

According to the court, the railroad retirement system mirrors that of the Social Security system. The Federal Insurance Contributions Act (FICA) taxes employers and employees to fund benefits distributed pursuant to the Social Security Act (SSA). Tax and benefit amounts are determined by the worker’s “wages,” the Social Security equivalent to “compensation.” Both the FICA and the SSA define “wages” employing language resembling the RRTA and the RRA definitions of “compensation.”

Citing previous decisions, the court held that “compensation” under the RRTA “encompasses not simply pay for active service but also pay for periods of absence from active service— provided that the remuneration in question stems from the “employer-employee relationship.”

Justice Gorsuch filed a dissenting opinion in which Justice Thomas joined.

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