132 | 2023 Cal-Peculiarities ©2023 Seyfarth Shaw LLP www.seyfarth.com 5.20 Employer’s Obligation to Withhold Taxes Due on Damages Judgment In America generally, an employer who pays money to settle a claim or satisfy a judgment can, and must, withhold income taxes and payroll taxes to the extent that the money represents lost income (back pay and front pay), because to that extent the payment, for purposes of the Internal Revenue Code, is wages. So it was that when United Airlines suffered a judgment in a California wrongful termination case, United withheld taxes from its payment of the judgment. Yet the California Court Appeal, in a 1992 opinion called Lisec v. United Airlines, held that United must pay the plaintiff the full amount of the judgment (and thus take its chances with the IRS) because the Court of Appeal, in an under-analyzed opinion that the IRS itself surely disagreed with, concluded that “the damages award was not ‘wages’ from which United was obliged to withhold taxes.”559 This California peculiarity finally came to an end in 2015, when a Court of Appeal decision challenged the Lisec holding. In considering a judgment against an employer for lost past and future wages, the Court of Appeal concluded that the employer “chose correctly” when it followed the “prevailing federal view” by withholding payroll taxes.560 The Court of Appeal observed that Lisec, and the cases that have followed it, “represent a dwindling minority view.”561 5.21 Can Employees Seeking UnpaidWages Bring Tort Claims? Conversion. The tort of conversion consists of a wrongful act to take the property of another. A tort claim can entitle the plaintiff to punitive damages in cases of malicious, fraudulent, or oppressive conduct. Courts traditionally have not recognized a tort action for unpaid wages. Numerous Labor Code provisions already permit employees to sue for prompt payment of wages, as well for civil penalties and attorney fees and costs. Although the California Supreme Court indicated an action for conversion might be available in a tip-pooling case (see § 7.20),562 that was a special situation (the employer allegedly had misappropriated gratuities left for employees), and was not a simple case of unpaid wages. A 2019 Supreme Court decision held that conversion of earned but unpaid wages is not a valid tort claim. The plaintiff worked for the individual defendant on several start-up companies, in return for a promise to pay wages later. The promised pay never materialized. The plaintiff successfully sued the companies for unpaid wages but also wanted to recover personally from the individual defendant, on a theory of conversion. In rejecting this theory, the high court noted that employees already have “extensive remedies” for unpaid wages, including contract and statutory remedies. The high court concluded that “a conversion claim is an awfully blunt tool” for deterring intentional failures to pay wages, as conversion “does not require bad faith, knowledge, or even negligence; it requires only that the defendant have intentionally done the act depriving the plaintiff of … rightful possession.” Conversion liability for unpaid wages would thus “not only reach those who act in bad faith, but also those who make good faith mistakes—for example, an employer who fails to pay the correct amount in wages because of a glitch in the payroll system or a clerical error. We see no sufficient justification for layering tort liability on top of the extensive existing remedies demanding that this sort of error promptly be fixed.”563 This large helping of common sense did not entirely win the day. A dissent by Justice Cuellar, joined by Justice Liu, formalistically argued that conversion should be available to recover unpaid wages because unpaid wages are the employee’s property once they are earned and payable.564
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