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High Court Calls Lost Wages Taxable in 7-2 Railway Ruling

Justice Brett Kavanaugh split from the conservative wing of the Supreme Court to join an opinion Monday that finds compensation to an injured railway worker qualifies as taxable wages.

WASHINGTON (CN) - Justice Brett Kavanaugh split from the conservative wing of the Supreme Court to join an opinion Monday that finds compensation to an injured railway worker qualifies as taxable wages.

Reversing in favor of the employer, Monday’s 7-2 ruling allows BNSF Railway to make a tax withholding on the $30,000 it owes ex-conductor Michael Loos in lost wages.

“Our decision in Nierotko undermines Loos’s argument that, unlike sick pay and vacation pay, payments ‘compensat[ing] for an injury,’ are not taxable under the RRTA,” Justice Ruth Bader Ginsburg wrote for the majority, using an abbreviation for the Railroad Retirement Tax Act.

The Supreme Court decided Social Security Bd. v. Nierotko back in 1946, holding that an award of backpay to a wrongfully discharged employee ranks as wages under the Social Security Act.

“Applying that reasoning here,” Ginsburg wrote, “there should be no dispositive difference between a payment voluntarily made and one required by law.”

While Justice Kavanaugh joined with Ginsburg in the majority, Justice Clarence Thomas joined a dissent by Justice Neil Gorsuch that begins with a cynical theory on what inspired BNSF to undertake this seemingly selfless quest to protect a federal program perpetually on the brink of insolvency.

“At trial, of course, a plaintiff ’s damages are what they are, and often juries will attribute a significant portion of damages to lost wages,” Gorsuch wrote. “But with the help of the asymmetric tax treatment they secure today, railroads like BSNF can now sweeten their settlement offers while offering less money. Forgo trial and accept a lower settlement, they will tell injured workers, and in return we will designate a small fraction (maybe even none) of the payments as taxable lost wages. In this way, the court’s decision today may do precisely nothing to increase the government’s tax collections or protect the solvency of any federal program. Instead, it may only mean that employees will pay a tax for going to trial — and railroads will succeed in buying cheaper settlements in the future at the bargain basement price of a few thousand dollars in excise taxes in one case today.”

As for the merits of the case, Gorsuch explains that the $30,000 in lost wages “represent[] the amount Mr. Loos was unable to earn because of the injury BNSF’s negligence caused.”

“No one would describe a dangerous fall or the wrenching of a knee as a ‘service rendered’ to the party who negligently caused the accident,” the opinion states. “BNSF hardly directed Mr. Loos to fall or offered to pay him for doing so. In fact, BNSF didn’t even pay Mr. Loos voluntarily; he had to wrest a judgment from the railroad at the end of a legal battle. So Mr. Loos’s FELA judgment seems to me, as it did to every judge in the proceedings below, unconnected to any service Mr. Loos rendered to BNSF. Instead of being ‘compensation’ for ‘services rendered as an employee,’ it seems more natural to say that the negligence damages BNSF paid are ‘compensation’ to Mr. Loos for his injury.”

But the majority rejected Loos’ case that the RRTA’s employee tax does not apply to personal-injury damages under the Federal Employers’ Liability Act.

“Tellingly, Congress did not adopt for RRTA purposes the exclusion of personal injury damages from federal income taxation set out in §104(a)(2),” Ginsburg wrote. “We note, furthermore, that if RRTA taxes were based on ‘income’ or ‘gross income’ rather than ‘compensation,’ the RRTA tax base would sweep in nonrailroad income, including, for example, dividends, interest accruals, even lottery winnings. Shifting from ‘compensation’ to ‘income’ as the RRTA tax base would thus saddle railroad workers with more RRTA taxes.

“Given the multiple flaws in Loos’s last ditch argument, we conclude that §104(a)(2) does not exempt FELA damages from the RRTA’s income and excise taxes.”

Gorsuch meanwhile questioned how the court would treat the award had it been given to a passenger on a train instead of an employee.

“In those circumstances, I doubt any of us would say the passenger’s damages award represented compensation for ‘services rendered’ to her employer rather than compensation for her injury,” Gorsuch wrote. “And I don’t see why we would reach a different result here simply because the victim of BNSF’s negligence happened to be one of its own workers. Of course, as the court points out, FELA suits may be brought only by railroad employees against their employers. But in cases like ours a FELA suit simply serves in the interstate railroad industry as a federalized substitute for a traditional state negligence tort claim of the sort that could be brought by anyone the railroad injured, employee or not. Inescapably, ‘the basis of liability under [FELA] is and remains negligence.’”

Gorsuch explains that Loos had to miss several months of work after he injured his knee by falling into a hidden drainage grate on a rail yard.

“Upon his return he had a series of absences, many of which he attributed to knee-injury flareups,” Gorsuch wrote. “When the company moved to fire him for allegedly violating its attendance policies, Mr. Loos sued.”

BNSF is represented by attorneys at Williams & Connolly and Steptoe & Johnson.

“We are pleased with today’s decision and grateful to the court for making this clarification and resolving this long-standing issue for the rail industry,” Roger Nober, BNSF executive vice president for legal & corporate affairs, said in a statement.

Loos was represented by the firms Kellogg Hansen in Washington and Schlichter Bogard & Denton in St. Louis, Missouri.

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