Indiana Court of Appeals Answers Issue of First Impression: Calculating Damages Under Wage Payment Act

by: Colin E. Flora

     In many ways it is surprising that the question addressed this week by the Court of Appeals of Indiana in GHPE Holdings, LLC v. Huxley. By the same token, it is also fairly surprising that the case was litigated the way it was. Due to the rather small amount in controversy, it is surprising that the case was not initiated as a small claim. Nevertheless, it has served a greater function to the law by elucidating an interesting question under Indiana’s wage statutes: “whether ‘wages’ due under the [Indiana Wage Payment Act (WPA)] post-termination is the gross wages due to the employee or the net wages after tax deductions.” The case also provides an excellent example of a Pyrrhic victory.

     As we discussed in a prior post, Indiana has two statutes intended, among other things, to protect employees who have not been paid the wages that they were due. As the court said in GHPE Holdings, “The WPA applies to persons, such as Huxley, who keep or quit their jobs, while the Wage Claims Act applies to those who are fired, laid off, or on strike.” For those seeking to bring an action under the Wage Claims Act, s/he must first file a claim with the Indiana Department of Labor before filing an action in court. The Wage Payment Act has no such prerequisite. The distinction is unimportant here, but is an important one to remember nonetheless.

     Huxley sought to recover just over $1,000 in unpaid wages, along with the statutory penalty, allowing him to treble that amount. Huxley’s former employer stated “that it ‘firmly believe [d] that it was clearly under a legal duty to withhold certain sums from Huxley’s last paycheck for tax purposes.’” The court determined:

We agree with this proposition. The withholding of federal income taxes from an employee's wages by the employer, in accordance with regulations promulgated by the Secretary of the Treasury, is mandated by 26 U.S.C. § 3402(a)(1). The Internal Revenue Service and federal courts have determined that awards of improperly[ ]withheld back pay following termination of employment are subject to mandatory tax withholding. Similarly, in Indiana, “[i]ncome tax is assessed on the wages of employees, but it is the employer who must 'deduct, retain, and pay' the tax to the government.” In light of this clear federal and state authority mandating employer withholding of tax obligations from an employee’s “wages,” we hold that an employer complies with the WPA if it deducts mandatory tax withholding obligations from an employee’s wages, whether such withholding occurs during or after the employee's term of employment.

The trial court had calculated damages based upon the gross wages. Consequently, the court reversed and sent the case back to the trial court to be recalculated using net wages.

     Although the court did not mention, it is obvious that the employer is not permitted to merely deduct this amount from the judgment; the employer will be obligated to allocate this money for tax purposes as it must were Huxley still employed. Further, the conclusion is one tied to the tax obligations of the employer in a specific scenario. If the “employee” is an independent contractor, such that the “employer” does not pay employment taxes on behalf of the employee, then no such deduction would be permitted.

     Interestingly, this result was nothing more than a Pyrrhic victory for the employer. An employee who successfully brings a Wage Payment claim is entitled to recover his costs and attorney fees. Recovery is not, however, limited to costs and fees expended before the trial court. As a result, Huxley requested an award for his appellate attorney fees as well. The employer, of course, argued that Huxley was not entitled to appellate attorney fees because the Court of Appeals reversed his Wage Payment Act award. The court disagreed:

Although we have partially reversed the WPA claim and Huxley will receive a slightly[ ]lesser amount on remand, it is consistent with the purposes of the WPA to permit him to recover appellate attorney fees with respect to this claim on appeal.

Doubtless, the additional attorney fees the employer is now liable to pay exceeds the roughly $350, at most, that might be saved by the appeal.

     Join us again next time for further discussion of developments in the law. 

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*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, clients or otherwise, should act or refrain from acting on the basis of any content included herein without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue.